Commentary & Analysis
A Look at the Quad/Graphics and World Color Press “Arrangement”
The joining of Quad/Graphics and World Color Press followed an intricate dance between giants. Quad/Graphics was the smallest of the three players in the contest for ownership of World Color Press. RR Donnelley's attempt to buy World Color out of bankruptcy failed and, shortly after, Quad/Graphics began discussions that brought the much larger World Color Press under the control of the Quadracci family.
By Gail Nickel-Kailing
Published: March 15, 2010
After a dip into bankruptcy – and 19-cent share prices – World Color Press (known as Quebecor World when the stock price bottomed out) has been dancing with David and Goliath on its way to an “arrangement” with Quad/Graphics.
Over the last several years, Quebecor World suffered declining sales and prices, and worked through a “retooling” of its operations that closed (or sold) 27 facilities. Twenty new web presses were purchased, nearly 40 presses were relocated, and over 70 units were sold or decommissioned.
In late 2007, Quebecor World bought back certain notes that had been sold in private placements and saw the credit available from syndicated credit facilities dry up. As a result of unsuccessful efforts to get new financing in a tight financial market and the inability to sell its European operations, by mid-January 2008, the company was in deep trouble.
An order for creditor protection in Canada and a petition for Chapter 11 bankruptcy protection in the US gave them some breathing room and by July 2009, the company had successfully reorganized, stabilized, and exited protection. Like a butterfly coming out of a chrysalis, Quebecor World not only looked different, it had a new (old) name: World Color Press.
On January 25, 2010, Quad/Graphics, the largest privately held printer in the US, and World Color Press, the second largest provider of print, digital and related services in the Americas, announced that Quad/Graphics will acquire World Color to serve customers in the US, Canada, Latin America and Europe with a staff of nearly 30,000 employees.
Who are the players?
Founded in Pewaukee, Wisconsin in 1971 by Harry V. Quadracci, Quad/Graphics has approximately 11,600 employees in the United States, South America and Europe, serving a diverse base of approximately 3,000 customers from 15 state-of-the-art printing plants (including a joint venture plant in Brazil) and 14 full-service imaging service centers (five of which are located within printing plants).
Originally incorporated as Quebecor Printing in 1989, World Color Press, together with its corporate office located in Montreal, Quebec, Canada, has 80 printing, distribution and office facilities located in North America and Latin America. World Color employs approximately 16,000 people in Canada and the United States, and approximately 2,400 people in Latin America.
Financial Pro Forma
Complicating the financial calculations of equivalent sales for the fiscal year ending December 31, 2009, is the accounting split between Quebecor World and World Color Press that occurred in July. An unaudited pro forma presented in the Quad/Graphics Form S-4 , filed March 5, 2010, calculates the following for the combined entity:
Quad/Graphics’ net sales for 2009 were $1,788.5 million and World Color Press’ net sales for the same period (combining World Color and Quebecor World sales) were $3,084.0 million.
Goliath Comes to Call – RR Donnelley
As early as August 2008, RR Donnelley had expressed an interest in acquiring a “significant” portion of the assets and businesses of Quebecor World. And with the exit from creditor protection looming, Donnelley again made overtures to Quebecor World on May 12, 2009, saying that their offer was “superior for the Quebecor Debtors and their creditors to the restructuring proposed by the Plans in their current form.” The first offer was for about $1.09 billion in cash and stock.
A second offer, made June 2, 2009, modified the proposal to include the assumption of significant pension liabilities and a commitment to work with Quebecor World to avoid any “inefficient tax characterization.”
A third offer on June 8, 2009, increased the total to more than $1.82 billion from cash, stock, and the assumption of an underfunded pension plan liability of $275 million.
Donnelley’s intent, as given in the letters to Quebecor World’s Board of Directors, was to “enhance our ability to provide customers more comprehensive end-to-end printing solutions, expand our geographic reach into the important Canadian market and better balance our capacity with customer demand.”
In a move that would protect its creditors from delays resulting from any lengthy antitrust review, Quebecor rejected the offer. The company’s Board, probably quite sensibly, feared the merger of two of the world’s largest printers would be considered monopolistic.
On July 21, 2009, Quebecor World implemented a plan of reorganization, exited bankruptcy protection, and changed the company name to World Color Press.
Dancing with David – Quad/Graphics
On August 11, 2009, World Color made overtures to Quad/Graphics. Mark Angelson, newly appointed Chairman of the Board for World Color, met with Joel Quadracci, president and CEO of Quad/Graphics, to “discuss industry developments.” During the meeting, Mr. Angelson suggested World Color and Quad/Graphics combine forces.
Quad/Graphics’ senior management decided to investigate the advantages and disadvantages of a combination, and on August 19, 2009, a meeting was held at the offices of Quad/Graphics’ outside legal advisor, Foley & Lardner. Attending were Joel Quadracci, John Fowler (Quad/Graphics CFO), and a representative from Foley & Lardner as the Quad/Graphics’ team and Mark Angelson, Kristopher Wood (an outside financial advisor to World Color), and a representative from World Color Press’ outside legal advisor, Sullivan & Cromwell, as the World Color team.
The preliminary discussion described a combination between the two companies in which Quadracci would be CEO. The parties agreed to an appropriate confidentiality agreement and to share initial due diligence.
Throughout August, the parties met on several occasions to discuss information relating to World Color’s operations and financial position, possible transaction synergies, as well as the possible economic and other basic terms of a transaction. As requested by Quad/Graphics, the parties agreed that, if a transaction were completed, the Quadracci family would control the combined company.
September 4, the Quad/Graphics board of directors was advised of the ongoing discussions with World Color and the board directed Quad/Graphics’ management to continue the discussions with World Color.
On September 8, 2009, World Color Press announced that Angelson would become CEO. A new CFO, CIO, and chief legal officer were also appointed.
During September 2009, representatives from both companies continued to meet to discuss the structure, price and other terms of a potential transaction, and exchange due diligence information. During these discussions, Quad/Graphics initially proposed a 70% Quad/Graphics and 30% World Color pro forma equity ownership split. By the end of September, the parties had narrowed the economic range to 60-65% Quad/Graphics ownership and 40-45% World Color Press ownership, subject to more detailed due diligence, negotiation of definitive transaction terms and approval of their respective boards of directors.
Discussions continued through October 2009, and on October 26, the Quad/Graphics board of directors was updated on the status of the discussions and received a report on the due diligence completed to date.
On October 28, 2009, World Color and Quad/Graphics met to discuss their respective due diligence to date and their synergy analyses. Further discussions were held regarding the economic split.
On November 8 and 9, 2009, World Color’s board of directors discussed the potential combination received presentations from management, financial and legal advisors on the possible transaction. World Color’s board of directors directed management to continue negotiations with Quad/Graphics but also to be prepared to move forward with the refinancing in the event the parties were unable to agree.
The board of directors of Quad/Graphics met again on November 16, 2009, joined by senior management and outside legal and financial advisors. The discussion centered on due diligence, valuation, and key terms, as well as the implications of Quad/Graphics becoming a publicly traded company. The board directed continued discussions with World Color.
On November 18, 2009, Angelson, Quadracci, Wood, and Fowler agreed to move forward to negotiate a transaction in which Quad/Graphics would go public and be the acquirer of World Color with a 60% Quad/Graphics and 40% World Color pro forma equity ownership split, a dual-class share structure, and respective cash payments at closing of $140 million to Quad/Graphics shareholders and $93,333,333 to World Color Press shareholders.
In late November and early December 2009, the two teams of representatives and their respective outside financial and legal advisors, continued their due diligence. On December 8, 2009, Quad/Graphics’ senior management made a presentation to World Color’s board of directors regarding the anticipated strategic, financial and operational characteristics of the combined company. Later in December, members of the World Color management team made their presentations to the senior management team of Quad/Graphics.
The parties also began to discuss the contractual terms of a transaction, including the scope of the voting and support agreement, if any, to be provided by the Quadracci family and other terms that affected the certainty of a transaction.
World Color Press’ board of directors met on several occasions in November and December of 2009 and January 2010 to, among other matters, receive updates regarding the potential transaction with Quad/Graphics.
On December 18, 2009, Quad/Graphics’ board of directors received a presentation on due diligence completed to date as well as status update of the potential transaction with World Color Press.
In early and mid-January, 2010, World Color Press and its outside legal advisors met with Quad/Graphics and its outside legal advisors to continue negotiations of the terms of a potential transaction. The parties came to agreement, subject to board approval and further negotiation, on the key terms of the transaction, including the 60% Quad/Graphics and 40% World Color Press pro forma equity ownership split and the dual-class (high vote/low vote) share structure with the low vote shares being listed and traded on a national stock exchange in the U.S.
Other significant issues that were resolved included the scope of the voting and support agreement, the efforts required to procure government approvals of the transaction, the scope of closing conditions, the exclusions from the definition of material adverse effect in the arrangement agreement, the scope of interim operating covenants, the availability to World Color Press common shareholders of any cash remaining of the $93,333,333 available after payments in respect of World Color Press’ other equity securities.
On January 19 and 24, 2010, the Quad/Graphics board of directors met to consider the proposed transaction with World Color Press. Quad/Graphics’ outside legal and financial advisors attended both meetings. At these meetings, the board received a wide range of status updates and other presentations and summaries. The board also received advice from J.P Morgan Securities regarding the financial aspects of the proposed transaction.
The Quad/Graphics board of directors unanimously approved the plan of arrangement and the agreement with World Color Press and concluded that the arrangement agreement and the transactions contemplated thereby are fair to and in the best interests of Quad/Graphics and its shareholders. The board authorized the execution of the arrangement agreement and approved the financing necessary to complete the agreement.
On January 7, 8, 15, 20, 24 and 25, 2010, World Color Press’ board of directors met to receive updates on transaction terms, due diligence results and other matters relating to the transaction. And on January 25, 2010, Morgan Stanley delivered to World Color Press’ board of directors its oral opinion, that the arrangement agreement was fair, from a financial point of view, to holders of World Color Press common
Following discussions among World Color Press’ directors over several meetings, the board unanimously approved the arrangement agreement and plan of arrangement with
Quad/Graphics. The board then authorized management to sign the agreement.
On January 25, 2010, World Color Press and Quad/Graphics executed the arrangement agreement.
Don’t Leave Any One Standing at the Altar
The combination is expected to close sometime during the summer of 2010; in the meantime there is an “out” for one or both parties.
The agreement may be terminated by Quad/Graphics and World Color Press with mutual written consent or by either Quad/Graphics or World Color Press if a law or ruling prevents it; the other party breaches – and does not correct – any representations; the other party’s board of directors recommendations to approve or shareholder approval are not forthcoming; or the other party enters into an agreement that requires it to terminate or fail to consummate the agreement.
Should the conditions allow – or require – termination by one of the parties, that party will be paid a termination fee of $40 million by the opposite party. Fees and expenses up to $20 million will also be reimbursed.
For additional information about the Quad/Graphics World Color agreement, see Quad/Graphics’ Form S-4, filed with the SEC on March 5, 2010
For additional information about World Color Press, see World Color Press’ annual report on Form 40-F filed with the SEC on March 1, 2010