Quad/Graphics makes $1.4 billion deal to acquire LSC Communications

Printer spun off from R.R. Donnelly in 2016

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Sussex-based Quad/Graphics Inc. on Wednesday announced a $1.4 billion deal to acquire LSC Communications, a transaction that could nearly double the company’s revenue, continue the consolidation of the printing industry and advance Quad’s strategy for dealing with industry disruption.

Joel Quadracci, Quad/Graphics chairman, president and chief executive officer, called the deal “a truly defining moment” for Quad and said LSC represented a legacy of “being one of these companies as I was growing up as a kid that my father always pointed to as part of R.R. Donnelley, the original R.R. Donnelley, that we always wanted to be like.”

LSC represents the publishing and retail-centric print services spun-off from R.R. Donelley & Sons in 2016. The company had around $3.9 billion in revenue over the last 12 months, primarily concentrated in magazine, catalog and retail inserts, books, and office products.

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“We believe as one company we will be positioned at the forefront of a new age of content distribution and consumer engagement,” said Tom Quinlan III, LSC chairman, president and CEO.

The deal is a 100 percent stock transaction. LSC shareholders will receive 0.625 shares of Quad’s class A stock in exchange for each LSC share they own, representing a 34 percent premium on LSC’s most recent closing share price.

LSC shareholders will have a 29 percent economic interest and 11 percent voting in the combined company. The Quadracci family will continue to have control of Quad/Graphics with 70 percent of the voting power. Quad is expanding its board, adding two current members of the LSC board when the deal closes.

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The transaction is expected to close in mid-2019. It is subject to regulatory and shareholder approvals, but Quad has already secured a financing commitment from JP Morgan Chase.

Dave Honan, Quad chief financial officer, said the combined company would be able to realize $135 million in synergies from the transaction within two years of closing.

LSC adds 59 manufacturing and distribution facilities to the 55 Quad/Graphics currently has in a print industry that is already seeing volume declines. An estimated $60 million in cost savings from the deal will come from capacity rationalization with another $50 million from administrative efficiencies and $25 million from supply chain management.

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The two sides did not address specifically where the cost savings would come from or which facilities might be included.

Quad has played the role of industry consolidator before, making a number of acquisitions since the Great Recession, including World Color Press, Vertis Holdings and Brown Publishing. In those cases, Quad’s Wisconsin operations have often been the beneficiaries of consolidation at other locations.

Joel Quadracci

“We have to be able to rationalize the platform, but most importantly make sure we’ve got the right talent in the right place to really execute for our clients,” Quadracci said.

He added the company has developed a deep team over the years with expertise in handling major acquisitions. He added there are lessons learned each time with one in particular being that it is possible to go faster than expected.

“It’s very data driven and we also very much use our heart as we make tough decisions,” he said.

The acquisition of LSC boosts Quad in two particular areas, book printing and office products. Books currently represent around 6 percent of Quad’s revenue, compared to 27 percent of LSC’s. Quadracci said the combination of the two companies would allow Quad to redefine the book supply chain.

Office products represents 14 percent of LSC’s revenue and it is an area Quad is currently not in.

“If you go back to our other acquisitions, we’ve had a lot of new things come to us,” Quadracci said, noting the Vertis deal brought media planning and placement and in-store signage businesses that have grown to be an important part of the company’s current strategy.

“We’ll learn about it and we’ll learn from them and we’ll make our decisions on how it fits best,” Quadracci said of the office products line.

The two companies do share a number of overlapping business lines and Quadracci said the deal will help fuel the company’s Quad 3.0 strategy. The strategy leverages the strong print capabilities and understanding of marketing data to convince companies to turn to Quad for fully integrated marketing services.

“For us, we are a big invoice for any of these categories, therefore we tend to have C-suite relationships, which allows us to start talking about this integration,” Quadracci said.

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