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Private equity – print money seeking an exit: magazine feature article

Thursday, 01 March 2007
By Print21

In the weeks leading up to Christmas, the printing industry on both sides of the Tasman was abuzz with takeover rumours and private equity speculation. Sparked by the audacious 84% takeover by CHAMP of Blue Star Printing, New Zealand’s largest printing company, the game had suddenly picked up pace. Now there were two New Zealand-based printing companies, with substantial shareholding and financial backing from private equity firms, hungry for acquisitions in Australia and New Zealand. Earlier in the year, Gresham Private Equity, another Sydney-based cash fund, had taken a controlling interest in Pacific Printing, GEON after that company’s ambitions to go public had been stymied by lack of nerve from its underwriters.

The word was out that both PE-driven groups were keen for further growth, for takeovers of large-scale printing companies in order to advance their strategic ambitions. Suddenly everyone was talking deals. PMP, the region’s largest printing company, was forced to put out a statement to the stock exchange after its share price began to gyrate under the influence of investment rumours. After denying anything much was happening, it then confirmed PE had made an approach and that it was talking to interested parties.

Promentum, Australia’s largest sheetfed printing company, was also under the gun, as both a target and a takeover player. It confirmed it had received a takeover approach from PE and other interested parties and stated that it was opening its books in order for due diligence to take place. Even Bob McMillan put out a tender proposal for his McMillan Printing in order to tap into the seemingly bottomless piles of PE cash that suddenly wanted to invest in the printing industry.

Going into the Christmas break, PMP tried to hose down expectations by issuing a statement that said while it was in conditional and exploratory talks with various parties, there was no guarantee that an official offer would be forthcoming. Anyway, nothing was likely to happen before February at the earliest. [It has recently announced – Feb 07 – it was no longer in discussions with PE; Ed.]

Promentum confirmed it had received a couple of firm offers and that it was going to take time over the holidays to consider its position and decide what was best for its shareholders (of which PMP is the largest with 26 per cent). McMillan’s apparently had some offers on the table although, unlike the other two, because it is a privately held firm, it was saying nothing.

Game and set to Pacific Printing

Two days before the end of 2006, Promentum announced its decision – the board of directors recommended the acceptance of an offer of $2.25 per share for all its shares, a total of $127 million, from Pacific Printing, conditional on it not receiving a better one by the time the deal went down. They undertook not to solicit other offers or publicly criticise the current one on pain of a $1.27 million break fee, and if a better offer was to emerge, Pacific has the right to trump it.

In other words… the deal is done and Pacific Printing,now GEON, a Gresham Private Equity company with a prospective turnover of $370 million per anum once it buys Promentum, is catapulted into the box seat as the largest sheetfed printing company in the region.

Once the most aggressive takeover company in the industry, Promentum had found itself in the position of being able to play off rival bidders in order to boost its price. Both Pacific Printing and Blue Star were in the bidding and although the price is not outrageous, it is certainly a very good deal for a printing company that suffered a profit downgrade last year. It is almost unprecedented in an industry that has struggled to justify return on investment in recent years.

Private equity or pirate equity?

To understand why printing is suddenly attractive to private equity funds it is important to realise the changed dynamics of the industry. The aim of the new game is simple – get as big as you can as fast as you can. Rationalise, cut costs, and leverage the bargaining power that comes with size, increase efficiency and eventually, from the point of view of the private equity funds, make a profitable exit, saddle bags loaded down with cash.

It is not rocket science and it is taking place in many other industries apart from printing. Private equity, fuelled in large part by superannuation funds awash with cash and desperate to find suitable investment vehicles, is changing the business landscape. Although relatively new to Australia and New Zealand, it is a long time fixture on the US commercial scene and its arrival here means that nothing will be the same any more. From Qantas to Alinta, Burns Philp to Sydney’s Kingsford Smith airport, private equity is the powerhouse of change, determined to keep companies, CEOs and yes, employees too, from getting too comfortable by making sure every invested dollar sweats to pay its way.

Depending on your point of view, PE funds are either the catalyst that allows market efficiencies to improve the operation of companies, or a bunch of freebooting mercantile adventurists, raiding worthwhile industries, cutting costs and jobs before selling off what’s valuable and forsaking the hulks they leave behind – pirate rather than private equity.

Come together right now

There is little doubt that the printing industry has long been ripe for consolidation. Promentum is a prime example of an enterprise which, under the visionary leadership of former MD, Alistair Hill, set the pace by growing from a small Victorian printing company in the 1990s to be the largest sheetfed printing company in Australia. Along the way it absorbed more than a dozen prepress and printing firms, some large, some small, along the east coast of Australia. It consolidated the businesses it acquired, retiring some of the industry’s long-established names, closing down sites, centralising and, then importantly, buying the latest, high-end printing presses, notably Heidelberg large perfectors.

Pacific Printing did the same in New Zealand, amalgamating 13 businesses and now operating ten sites at present on both sides of the Tasman. It only came across the ditch when, according to its founder and CEO at the time, Geoff Wilding, it had run out of high-class assets to buy in New Zealand.

Blue Star was the first to span the two antipodean markets, operating in both sheetfed and web printing. From humble beginnings in the 1990s it swiftly rose to become New Zealand’s largest printing company under the leadership of managing director, Tom Sturgess. It may have been pipped at the post in its bid for Promentum but it remains in the marketplace, a player in every significant deal going down. Just days before the Promentum deal was done it announced the acquisition of Melbourne mailing house, 55 Laser, which it intends to move onto its new multi-million dollar greenfield site in Collingwood.

The three consolidating companies (Pacific Printing now GEON, Blue Star and Promentum; four if you include PMP, which has its own longer history of amalgamations and takeovers from the 1990s) were all active before the advent of private equity, so anyone looking for a bogeyman better look elsewhere. But the consolidation drive in the industry undoubtedly became supercharged with the Gresham Private Equity takeover of Pacific Printing. The deal gained the Sydney-based investment firm a controlling interest in the business, valuing the printing company at $220 million. According to Roy McKelvie, managing director of Gresham Private Equity, the strategy is to engage management while transforming the enterprise into one that is cashed up and ready to grow by acquisition in Australia and New Zealand.

The new princes of print

There is no doubt that Roy McKelvie is not your average printer. Despite being the controlling influence behind Pacific Printing he is not a printer at all, as he is the first to admit. The amiable Glaswegian views the world from the top floor of the company’s eponymous building in Macquarie Street, Sydney – where Gordon Towell, CEO Pacific Printing, lately of Auckland, has located his HQ.

From here the view of the harbour is spectacular, while the prospects of the printing industry appear very different to those put forward by conventional wisdom.

“When we first took a look at the printing industry we were told it’s a sunset rather than a sunrise industry but that seems to us to be a simplistic and erroneous perspective,” said McKelvie. “When you look at what the customers want, you see they require sophisticated national solutions for their commercial needs. There is a lot of opportunity here for a high-tech offering.”

To McKelvie the printing industry has all the requirements PE looks for – changing technologies that are blurring traditional production segments and many small- to medium-sized companies that cannot keep up in investment or in management. On the one hand he sees printing in terms of a manufacturing industry – “simply changing the pattern on the paper” – while, on the other, a sophisticated IT front end will enable the printer to become a service and fulfilment provider. Either way he envisages a very different industry in the future.

“It’s a time of change and turmoil. The days are numbered for a lot of old fashioned small printers. Five years from now the industry will be radically different,” he said.
While he believes there will still be many small and specialised niche players operating, there will also be five or six large scale commercial printing companies turning over hundreds of million of dollars, with sophisticated product offerings and a sophisticated management cadre.

In this scenario the singular advantage the PE-backed companies will have over traditional owner-operated printers is being able to leverage the advantages of scale. Buying paper, ink or presses for a group that turns over half a billion dollars will, according to McKelvie, produce price advantages that smaller printers will not be able to match. He also sees the value in hiring more sophisticated managers carrying none of the baggage of craft-influenced industry.

CHAMP has its own champion

Down the road on the fourth floor of the iconic Sydney Customs House, Nat Childres, the director of CHAMP PE responsible for the $341 million Blue Star buy-in, is disarming about their involvement.

“We invested in Blue Star based on the strength of its business model, in its management and people, not simply to get exposure to the broader printing industry. We have no specific operational insights into the printing industry, aside from the obvious potential for further industry consolidation, but we did track the company over a number of years and were impressed by the quality of its management team,” he said.

The management team, led by Tom Sturgess in New Zealand, are all equity players in the company and, while CHAMP has the controlling interest, Childres is happy to let them run the show.

“They have an outstanding track record and earnings continue to grow.”

Childres appears confident of the prospects for PE’s ultimate goal – the exit strategy. A public stock offering, sale to an offshore investor or even to another PE fund are all possibilities. He echoes McKelvie’s belief in the benefits of leveraging scale in getting better terms for raw materials and equipment. Getting bigger is likely to be better. Apart from that, he believes the fund brings financial discipline and overall strategy experience to the table.

Is that all there is?

At bottom it is a startlingly simple idea – cutting the costs of inputs and corporatising management – on which to expend hundreds of millions of dollars, especially into an industry where owner/management investment notionally does not return interest on capital. There are not many printing conglomerates of comparable size ($400 million turnover) around the world against which the benefits of such scale can be measured. There is the largest printer in the world, RR Donnelly in the US, and then there is the ill-fated Polestar in the UK, which saw all its PE investors taken for a bath, big time. In the light of the traditional small- to medium-size domination of the industry, the question must be asked … is there an optimum size for a printing company? Just because you can go big, should you?

Roy McKelvie admits investing in the printing industry is not without risks, but he is sanguine about the prospects of a successful exit, even though there is no blueprint to which he will admit. International investors, a public float, management buyouts, a private sale … all are options and all will do quite nicely – if the price is right.

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