Quad/Graphics, LSC face $1.5 billion sales decline by 2022 without merger, additional actions

Quadracci says projections underscore rationale for deal

The planned combination of Quad/Graphics Inc. and LSC Communications Inc. would create a company with around $8 billion in annual revenue, but if the two printers continued on their own they both face sales declines of 17 to 21 percent by 2022, according to Quad/Graphics estimates.

Quad/Graphics’ Sussex headquarters.

Sussex-based Quad/Graphics disclosed its five-year projections as part of a securities filing connected to its $1.4 billion acquisition of LSC. The two companies exchanged projections and other financial details during the negotiation of the deal, which was announced in late October.

The filing shows Quad/Graphics first approached Chicago-based LSC Communications in May about a potential transaction after initially engaging advisors for the deal in late 2017.

The estimates included in the filing represent a more than $1.5 billion drop in the combined annual revenue of the two companies, but the projections are also based on current industry trends continuing and the companies not taking additional actions to stem the declines. Quad has already taken other steps, announcing the planned $132.5 million acquisition of Minnesota-based creative agency Periscope in November.

Despite an expected increase this year, Quad is projecting its sales would fall to $3.45 billion in 2022, absent the LSC acquisition or any other mitigating actions. The decline represents a 17.6 percent drop from 2018’s expected result.

LSC’s projections painted a slightly rosier picture of the industry, estimating its sales would decline by around 8.8 percent during the next five years.

Quad executives did their own analysis of the industry and LSC’s business and came to a more pessimistic conclusion, estimating LSC revenue would decrease by 21 percent by 2022.

Joel Quadracci

Joel Quadracci, chairman, president and chief executive officer of Quad/Graphics, said his company tends to be conservative in its modeling of sales trends so if the declines are not as severe the business stands to benefit.

“We always believe hope is not an operating strategy,” Quadracci said. “Ultimately, you’ve got to invent your future; you can’t wait for it to happen to you.”

He said the stark projections – a $739 million drop in revenue for Quad and a $790 million drop for LSC by 2022 – underscore the reasoning for two of the printing industry’s largest companies to combine their operations.

“Everyone knows that print is dealing with a decline … it doesn’t mean print is going away,” Quadracci said.

After spending several years completing industry consolidating acquisitions, Quad has shifted in recent years to transforming itself into an integrated marketing platform. Print is still at the heart of the business, but the company also has offerings in logistics, marketing analytics and creative services.

Quadracci said returning to industry consolidation is “very consistent” with the company’s transformation strategy.

“I think people kind of miss how interrelated they are,” he said.

The combination of Quad and LSC will allow the industry to continue managing the decline in print volumes, Quadracci said. The idea is to shift volumes to more efficient printing facilities while closing more outdated ones to remove capacity.

When Quad has done industry consolidating deals in the past, the company’s Wisconsin operations have benefited with an influx of new work and jobs. Quadracci said when the LSC deal was announced that the Wisconsin network stands to benefit, if the company can find enough employees.

At the same time, the deal gives Quad access to more marketing professionals across a more diverse set of clients. Quadracci said those clients are struggling with a multi-channel world and Quad is positioned to help them with its print and digital capabilities.

But the deal still needs approval from the shareholders of both companies and regulators. The U.S. Department of Justice last week asked both companies for additional information as it reviews the transaction.

Quadracci and Dave Honan, chief financial offier of Quad/Graphics, say the deal should be evaluated not just in the context of the printing industry but in the broader context in which print is competing.

“That revenue is going into other means of media, primarily digital,” Honan said of the projections.

The planned combination of Quad/Graphics Inc. and LSC Communications Inc. would create a company with around $8 billion in annual revenue, but if the two printers continued on their own they both face sales declines of 17 to 21 percent by 2022, according to Quad/Graphics estimates.

Quad/Graphics’ Sussex headquarters.

Sussex-based Quad/Graphics disclosed its five-year projections as part of a securities filing connected to its $1.4 billion acquisition of LSC. The two companies exchanged projections and other financial details during the negotiation of the deal, which was announced in late October.

The filing shows Quad/Graphics first approached Chicago-based LSC Communications in May about a potential transaction after initially engaging advisors for the deal in late 2017.

The estimates included in the filing represent a more than $1.5 billion drop in the combined annual revenue of the two companies, but the projections are also based on current industry trends continuing and the companies not taking additional actions to stem the declines. Quad has already taken other steps, announcing the planned $132.5 million acquisition of Minnesota-based creative agency Periscope in November.

Despite an expected increase this year, Quad is projecting its sales would fall to $3.45 billion in 2022, absent the LSC acquisition or any other mitigating actions. The decline represents a 17.6 percent drop from 2018’s expected result.

LSC’s projections painted a slightly rosier picture of the industry, estimating its sales would decline by around 8.8 percent during the next five years.

Quad executives did their own analysis of the industry and LSC’s business and came to a more pessimistic conclusion, estimating LSC revenue would decrease by 21 percent by 2022.

Joel Quadracci

Joel Quadracci, chairman, president and chief executive officer of Quad/Graphics, said his company tends to be conservative in its modeling of sales trends so if the declines are not as severe the business stands to benefit.

“We always believe hope is not an operating strategy,” Quadracci said. “Ultimately, you’ve got to invent your future; you can’t wait for it to happen to you.”

He said the stark projections – a $739 million drop in revenue for Quad and a $790 million drop for LSC by 2022 – underscore the reasoning for two of the printing industry’s largest companies to combine their operations.

“Everyone knows that print is dealing with a decline … it doesn’t mean print is going away,” Quadracci said.

After spending several years completing industry consolidating acquisitions, Quad has shifted in recent years to transforming itself into an integrated marketing platform. Print is still at the heart of the business, but the company also has offerings in logistics, marketing analytics and creative services.

Quadracci said returning to industry consolidation is “very consistent” with the company’s transformation strategy.

“I think people kind of miss how interrelated they are,” he said.

The combination of Quad and LSC will allow the industry to continue managing the decline in print volumes, Quadracci said. The idea is to shift volumes to more efficient printing facilities while closing more outdated ones to remove capacity.

When Quad has done industry consolidating deals in the past, the company’s Wisconsin operations have benefited with an influx of new work and jobs. Quadracci said when the LSC deal was announced that the Wisconsin network stands to benefit, if the company can find enough employees.

At the same time, the deal gives Quad access to more marketing professionals across a more diverse set of clients. Quadracci said those clients are struggling with a multi-channel world and Quad is positioned to help them with its print and digital capabilities.

But the deal still needs approval from the shareholders of both companies and regulators. The U.S. Department of Justice last week asked both companies for additional information as it reviews the transaction.

Quadracci and Dave Honan, chief financial offier of Quad/Graphics, say the deal should be evaluated not just in the context of the printing industry but in the broader context in which print is competing.

“That revenue is going into other means of media, primarily digital,” Honan said of the projections.

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