Quad, LSC agree to break off $1.4 billion deal

Decide not to challenge DOJ lawsuit

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The court fight over the proposed acquisition of LSC Communications by Quad/Graphics had barely gone one round but the two printing giants said Tuesday that they mutually agreed to terminate the $1.4 billion deal.

When the deal was announced, Joel Quadracci, chairman, president and CEO of Sussex-based Quad, said it represented a “truly defining moment” for the company started by his father. Chicago-based LSC Communications represented the legacy printing business of R.R. Donnelley, the industry giant Quad had competed against for decades.

Shareholders from both companies approved the deal and Quadracci expressed optimism that regulators would sign off as well, but in June the U.S. Department of Justice filed a lawsuit seeking to block the deal.

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The companies said challenging the DOJ lawsuit would come with additional costs and uncertainty.

“We are disappointed by the Justice Department’s decision to sue to block the transaction and believe that the lawsuit does not reflect the dynamics of print today and the competitive effect of digital media. However, rather than devote time and resources to prolonged litigation, we are choosing to focus on ensuring that our clients benefit from our Quad 3.0 growth strategy,” Quadracci said.

The DOJ argued that if the deal were approved Quad would dominate markets for magazine, catalog and book printing, allowing it to raise prices and reduce quality at the expense of publishers, retailers and consumers.

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Quad pledged to “vigorously defend” the deal after the lawsuit was filed and LSC chairman, president and CEO Thomas Quinlan III said the DOJ was “wrong in its assessment of our transaction.”

Quadracci argued that printers are no longer competing amongst themselves but must deal with threats from digital advertising. He noted the entire printing industry has combined revenue of $76 billion in revenue while Google and Facebook have more than $75 billion in digital ad revenue.

But the government pointed to printing contracts where Quad and LSC were competing against each other and offering millions of dollars in various incentives to lure or keep customers.

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The court case, however, never reached a conclusion on the competition issues. The case was scheduled to go to trial in mid-November after a judge sided with the DOJ over Quad and LSC.

The companies had asked for an expedited hearing process, citing a clause in their merger agreement that would terminate the deal if it was not completed by Oct. 30, one year after it was initially announced. Quad also faced the prospect of paying LSC a $45 million fee if the deal was not completed by the deadline. The company will pay LSC the fee as part of the agreement to terminate the deal.

The government argued the deadline was an artificial one and the companies could extend it if they wanted to. Quad and LSC had planned to complete the deal by mid-2019 and argued that they either had to close on the transaction by the deadline or start their own separate actions. The companies’ own projections suggest they face a combined $1.5 billion drop in sales by 2022 without the deal and additional actions, according to securities filings.

According to court records, LSC was open to a short extension of the deadline but Quad did not want to entertain the possibility.

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