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Private equity vs owner operator – the game is on: Print 21 magazine article

Monday, 27 August 2007
By Print 21 Online Article

Some people believe that consolidation is a fact of life in business, as inevitable as the turning of the tides or the setting of the sun. In this worldview, the big fish grow stronger, gobbling up the little fish until eventually there are no more little fish to eat and they can grow no more (unless they eat each other). It’s a phenomenon that’s been witnessed in other industries, some of them closely related to printing, and so, naturally, it seems it must happen here as well. Undoubtedly, in a shrinking market, there is plenty of scope for amalgamation, takeover and merger activity, but where will it all end and what will the industry look like when it’s finished?

New Zealand has been living with this kind of entrepreneurial activity for longer than the Australian market; after all, the main consolidating players, Geon and Blue Star, have their roots in the NZ market and their modus operandi is perhaps more familiar here. (Blue Star has four sheetfed printing operations in New Zealand – McCollams, Nicholson Print, Printlink and Securacopy; Geon has six NZ operating businesses – Albion Graphics, BFG, BPG, Brebner Print, PrintCo and Kiwi Labels.) Both groups have spread their operations across the Tasman and are now approximately of equal size.

Even long-time watchers of the New Zealand industry, however, are forced to acknowledge that the current scenario is like nothing ever witnessed before. True, consolidation has always taken place, with companies rising and falling, expanding and deflating, but what makes it different this time around is the huge influx of private money, impossible to resist or repel, and the fact that the industry seems to be getting rapidly smaller.

Prices heading south
The one over-riding concern (perhaps fear is too strong a word) among printers is that the current changes will drive down prices in the industry. In this scenario, the big two companies will be able to leverage economies of scale, particularly on consumable items such as paper, and subsequently promote lower prices for print, further eroding already thin margins. The massive press capacity of the major players – as demonstrated by the new Geon site in Auckland due to come on stream – will also be able to soak up whatever the market demands like blotting paper, leaving little else for the remaining players to fight over.

Paranoia or legitimate concern? What are the odds on a price war breaking out – and has it in fact already started? Views are mixed about this and it should be noted that there is no hard evidence that the large groups are winning share by lowering their prices. Equally, everybody acknowledges that printers will always try to compete on price, but they are also very aware of anyone trying to undercut a fair market return. From time to time there are outbreaks of price cutting in every market, perhaps as a business tries to capture market share or as a precursor to some other market activity, such as further consolidation. So is this happening now? Reports are inconclusive although there is always someone, somewhere who is losing market share and prepared to point the finger. Everybody agrees though that price wars are bad for the industry, a short-term response to market pressures that inflicts damage on margins from which the industry rarely recovers – but that doesn’t stop them from happening.

Taking a more positive attitude, printers also aware that not every print customer will want to go to a large manufacturing-type operation, preferring personal contact and a hands-on approach. This is especially so for regional printers who are usually hard wired into local businesses. One printer reflected that "there will always be Geon customers that I don’t want and I have customers that Geon doesn’t want." Well, you can always live in hope. What this suggests though is that, as the industry changes, new opportunities will always present themselves, gaps in the market where people who are smart or innovative or flexible or simply bloody good at what they do can carve out a niche.

And when it comes to being all those things – clever, innovative, flexible etc – the Kiwis seem to do it better than anybody. Indeed, if there is an apparent lack of concern (real or pretend) about what is happening, it may have something to do with the fact that New Zealanders are old-hands at adapting and doing whatever it takes to stay in the game. Time and time again, you hear as a preface to some comment the phrase, "Well, the market here is so small …" Well, it’s true – the numbers are tiny compared just about anywhere else, but the result is the flexibility, the openness to new ideas, the fast adoption of new technology and the efficiency of operation required to stay alive in a small pool. Nimble and quick, the little fish thrive in an environment where, to date, no one can be sure if big fish will survive.

Competition breeds winners
While there may be a lot of talk about preparing for the price war to come – and it’s worth noting that expectations here could produce a result that nobody wants – few printers we spoke to had any doubt that they will survive and even thrive in this ultra-competitive environment. With an average printing business employing less than ten, downsizing and cost cutting can often be quite dramatic and effective, especially in the short term. The sense is that most of the businesses that have closed down, been amalgamated or otherwise left the industry have been in the main centres, especially Auckland. The regional printers, for instance those we spoke to in Christchurch, are well-established and balanced and confident they can resist the raids from the centre. Because the regional markets are so small, most printing companies have an export mentality, even if they are only sending print to another part of the country.

From all indications, the advent of the larger groups is not likely to have a significant effect on the make-up of the industry. Which begs the question, if the consolidators do not succeed in reducing the number of independent operators where does that leave their highly geared strategies? Can they achieve the radical transformation of the industry in the face of what appears to be a very determined resistance?

To some extent, printers are already looking beyond what is happening now and wondering how the end game will play out. What happens when private equity decides to leave the industry? And on what terms will it do so? Certainly, there is the expectation that the PE players are only in it for the short term. As soon as they spot an opportunity to leave the industry with a profit they will do so, either by splitting up companies and selling off different parts or by making the business look as healthy as possible and then floating it. People are also very aware that a lot of damage can be done to the industry in the meantime but they recognise that these things come in cycles and that the main point is to ride them through. What comes around will come around again.

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