- PrimeSource: Moving $80 million worth of Fuji products a year - Heartland Imaging was involved early - Unusual trading on PrimeSource stock forces press release on deal (Our exclusive intelligence reports are based on company sources, public SEC documents and industry consultants following the print and publishing industry. At times, it is necessary to quote unnamed sources. As a tradeoff for protecting sources, we are able to reach beyond the surface and gain a deeper understanding of key issues impacting the industry. If you have any questions about this story, please contact us.) 9/25/01 - After months of negotiations, Fuji Photo Film USA announced on August 31st their intention to acquire PrimeSource. PrimeSource is one of the largest dealers of graphic arts supplies with over $500 million in annual revenue. PrimeSource sells around $80 million a year for Fuji’s Graphic Systems Division and is their largest customer. (Fuji said PrimeSource sold $79 million of their products in 1999, $87 million in 2000 and $42 million through June of this year.) The process started in November of 2000 as a simple idea to have a “meeting of the minds” to discuss opportunities and challenges within the print and graphic arts industry. We now know those discussions took several turns. What apparently started as general conversation went from discussing a possible Fuji financing of dealer consolidation to Fuji deciding to acquire their top three dealers outright. With PRINT 01 around the corner and heavy trading activity on PrimeSource’s stock, both decided to announce the pending deal. PrimeSource’s stock trading volume usually ranged between 1000 and 5000 shares a day. However, between Monday (8/27/01) and Thursday (8/30/01) volume skyrocketed averaging just over 21,000 shares per day. Meanwhile, PrimeSource’s stock price rose from $4.02 per share on August 22nd to $5.60 the day before the announcement, a 28% increase. Executives from both companies concluded that a press release was in order. On August 31st Fuji confirmed their Board in Japan had approved the transaction and would pay $10.00 per share in cash for PrimeSource’s stock. Time-Line Last November, Jim Mullan, PrimeSource’s CEO contacted Fuji to discuss economic conditions and options related to the distribution channel in the graphic arts supply market. Sources say at the time, there was no intention of having Fuji acquire PrimeSource. Those decisions would come much later - initiated by Fuji Film. Also at the time, Heartland Imaging’s principal, Bob Gourley contacted Mullan to discuss options for the future. Heartland is a privately held dealer of graphic arts supplies and also a non-exclusive dealer for Fuji Film. From Heartland and PrimeSource’s initial discussions, the plan was to combine the two companies with financial help from Fuji Film. A meeting took place in mid-December between Fuji, PrimeSource and Heartland executives. Financial data was exchanged and Fuji indicated it would consider financing the consolidation. Key executives involved in these discussions from Fuji were Stanley Freimuth, Chief Operating Officer, Sam Monroe, Director of Business Strategies and Daniel Maffeo, VP of Fuji’s Graphic Systems Division. A second, more formal meeting took place in late January between Heartland, PrimeSource and Fuji executives. Sources say this meeting included the Chief Financial Officers and involved “serious intent to move into the most sensitive areas of financial and operational data sharing.” Change of Heart In April, Fuji alerted PrimeSource that they were not interested in the financing discussed before, but wanted to propose an outright acquisition of PrimeSource. At this time, Fuji also alerted Heartland and Graphic Systems, Inc (another Fuji dealer led by Jon Wright) that they would seek an acquisition of those respective companies as well. By June, Fuji’s Board of Directors in Japan gave the official green light to pursue the purchase. PrimeSource then hired Berwind Financial, L.P. to advise the company of the possible sale. Fuji’s advisor, Bear, Stearns suggested an equity value of $9.00 per share. Berwind and PrimeSource balked and after a half dozen proposals and counter proposals, the two agreed on an equity value of around $69 million. (The total acquisition price is approximately $118.4 million, including transaction costs and PrimeSource's existing debt.) Fine tuning the agreement was a “pain staking process.” Negotiations continued even past the press release announcing the acquisition plan on August 31st. Areas of concern and negotiation included Jim Mullan’s employment after the sale, PrimeSource’s partnership with Xeikon in the Canopy Joint Venture, the minimum number of shares required to be tendered in order to consummate Fuji’s offer and the amount of any termination fee and cap on expense reimbursements which Fuji would receive in case the merger was terminated. No Looking Back Obviously, these matters have been resolved and Fuji is seriously committed to shoring up the dealer network. "The key to delivering value to our customers is to have a strong distribution channel,'' Daniel Maffeo of Fuji Film said after the announcement. "We have always been committed to the U.S. graphic arts market, and this action underscores that commitment. We see a changing market and believe the distribution and support of this market must change as well.'' Fuji Film believes the graphic communications industry needs a national distributor backed by a financially stable global company. Industry analysts say this move is good for the industry. It is certainly good for PrimeSource shareholders who have not seen their share price above $8.00 since the 3rd quarter of 1999. Jim Mullen will assume the role of President of the new $800 million subsidiary. Heartland’s Bob Gourley and Graphic Systems’ Jon Wright will become VP’s. It will be interesting to see what’s next from Fuji and their competitors - which not only includes Kodak and AGFA, but now Pitman, xpedx and 250 other dealers.