Like many print-industry pros, I followed the bidding war that broke out in Q4 2021 when two private equity groups submitted competing proposals to acquire R.R. Donnelley. In a series of press releases that Chatham Asset Management and RRD issued from October 12 through mid-December 14, we learned about the competing proposals that RRD’s Board had received to take the company private.

This deal was a textbook example of how one company’s board can leverage a deal on the table to attract potentially higher offers from other suitors.

But this bidding war was unusual for the printing industry because it involved billions of dollars and pitted a financial buyer against a strategic buyer.

Before discussing how the deal unfolded and what troubles me about it, let’s look at the background of the three key players in this business drama.

Background

RR Donnelley & Sons (RRD)  was founded in 1984 as a small Chicago print shop by Richard Robert Donnelley. Today RRD is a global provider of multichannel business communications and marketing solutions. The company has 30,000 clients and 33,000 employees in 28 countries.  Revenues in 2019 were  $5.4 billion, down from a high of $10.4 billion in 2013 before the company split into 3 companies in 2016 in a debt-reduction effort.

The two spin-off companies were LSC Communications Inc. (LSC) and Donnelley Financial Solutions.

Led by former RR Donnelley CEO Thomas J. Quinlan III, LSC Communications was established to better serve publishers, brands, retailers and merchandisers by offering specialized solutions.

Donnelly Financial focuses on financial communications and data services.

In 2018, RRD-rival Quad Graphics (a $4.2 billion company) announced plans to acquire LSC Communications (a $3.9 billion company).  The proposed merger had the potential to surpass RR Donnelley as the world’s largest printing company.  In June 2019 the antitrust division of the U.S. Dept. of Justice sued to block the acquisition. Quad and LSC Communications called off their merger in July 2019.

Atlas Holdings and its affiliates own and operate 23 platform companies and employ approximately 40,000 associates across more than 250 facilities worldwide.  Atlas operates in a variety of industrial sectors including packaging, paper, power generation, printing, pulp, supply chain management and wood products.

In 2020, Atlas acquired the assets of LSC Communications. So, when it appeared likely that Atlas would prevail in their attempts to acquire RRD, the deal would bring RRD under the same ownership group as LSC.

Chatham Asset Management LLC is RRD’s largest stockholder and debt holder. A private investment firm, Chatham manages funds that own approximately 14.9% of the outstanding common stock of R.R. Donnelley & Sons. Chatham is also the Company’s largest bondholder.

Timeline

On October 12, 2021 Chatham submitted an unsolicited proposal to acquire all of the common stock not already owned by Chatham for $7.50 in cash. In addition to buying outstanding shares of common stock, Chatham plans the equitization and/or subordination of up to 57.3% of RRD’s outstanding notes, which would reduce RRD’s annual interest expense by $60.9 million.

In the October letter to the RRD Board, Chatham stated that “We no longer have confidence in RRD’s ability to achieve full and fair value as a public company under the current Board and management team. As long-term investors in RRD, we believe our offer presents the best path forward for the Company to unlock its intrinsic value while also providing shareholders immediate and substantial cash.”

On November 3, RRD announced a definitive agreement to be acquired by affiliates of Atlas Holdings in an all-cash transaction with a total enterprise value of approximately $2.1 billion. Atlas agreed to acquire all outstanding shares of RRD common stock  and pay all RRD stockholders $8.52 per share.

When this definitive agreement was announced, RR Donnelley anticipated that the deal would close in the first half of 2022 and make RRD a private company. Even though the agreement with Atlas allowed RRD to solicit additional acquisition proposals for the next 25 days, both RRD and Atlas seemed optimistic that the merger would occur. The agreement included a $20 million termination fee and expense-free reimbursement to Altas if RRD canceled the agreement to accept another offer.

“Today’s announcement represents an exciting next phase of RRD’s journey,” said Dan Knotts, RRD President and Chief Executive Officer.

“We are excited to have reached this agreement to acquire R.R. Donnelley and Sons, an iconic name in the business communications, marketing and printing industries, ” said Tim Fazio, Atlas Co-Founder and Managing Partner. “Atlas is a trusted partner for businesses that have both a demonstrated record of innovation and customer service and, at the same time, clear opportunities for continued growth.”

On the same day the Atlas/RRD deal was announced, Chatham submitted an enhanced offer to acquire all of the RRD common stock not already owned by Chatham for $9.00 to $9.50 in cash.

And by the time the 25-day “go-shop” period in the Atlas merger agreement expired on Nov. 29, RRD had received an alternative acquisition proposal from a third (unnamed) strategic buyer for $10.00 per share in cash.

On December 9, The RRD Board accepted a revised proposal from Atlas that increased the price per share to $10.35. The revised agreement included a $32 million termination fee and expense reimbursement charge if the deal with Atlas was canceled.

Later that day Chatham, submitted an increased, fully financed offer to acquire all of the RRD common stock not already owned by Chatham for $10.85 per share in cash. In November, Chatham had agreed to pay Atlas the termination fee and expense reimbursement if RRD canceled the Atlas agreement.

In a publicly released letter, Chatham argued that “RRD’s Board has once again shirked its fiduciary duties and deprived stockholders of receiving a higher price for their shares by refusing to meaningfully exchange with Chatham and agreeing to an inferior transaction with a higher, entirely avoidable termination fee and expense reimbursement.”

On December 14, RRD announced that it had entered into a definitive merger agreement to be acquired by affiliates of Chatham Asset Management. Shareholders would receive $10.85 per share. RRD terminated its previously announced agreement with affiliates of Atlas Holdings.

Upon completion of the Chatham transaction, RRD will become a private company.

“As a long-standing supportive investor in RRD, we are pleased to have reached an agreement with the Company,” said RRD. “RRD possesses a strong portfolio of assets and capabilities and we look forward to leveraging our deep understanding of its businesses, as well as our extensive experience in the print media and related industries to drive long-term value for all stakeholders.”

What Do I Think? 

RRD stockholders are probably pleased to see the rise in share prices.

But if you are an RRD client or employee, you have to wonder how all this haggling will turn out in the end.  Here are some thoughts.

There is no guarantee that this deal will close. And only time will tell if the post-deal integration works.  For a variety of reasons, 70% of all announced deals fall apart eventually. We won’t know whether this deal will succeed until at least 24 months after the deal  closes. (We will also remain cautious about accepting the “forward-looking statements” that company executives may make in press releases.)

It is much harder to grow a company than to invest other people’s money. This is especially true when the needs of the people who make the company run get lost in the shuffle. From my experience, I believe four things contribute to a successful deal:

PEOPLE – attracting and retaining the right people to help the new company move forward
STRATEGY – communicating a clear vision of how to grow the company
EXECUTION – having experienced, knowledgeable people implement the right steps
CASH – having enough money after the sale to make additional investments in branding, technology, marketing, and people to execute the strategy.

It’s like getting into a bidding war to buy a house. Buyers get so caught up in all of the excitement of closing on a house, they neglect to consider how much additional money they will need to renovate and maintain the asset and keep it operating well into the future.

Key employees may not wait around for the deal to close.  It’s public knowledge that some RRD executives have already started exiting. Although long-time, retirement-age employees may adopt a wait-and-see approach, up-and-coming younger employees might jump ship if they sense the deal will result in layoffs and cost-cutting.

Finding and retaining new talent will be hard in 2022 because so many people want to work as independent contractors with a 1099 instead of a W-2. This not only gives them flexibility in their day-to-day schedules, but also the flexibility to leave toxic work cultures.

I feel bad for the people who remained with RRD just to see what happens. Many long-time employees probably haven’t thought about applying for another job in years.  But as my Dad always told me, “Eventually everything comes to an end” so it’s always good to be prepared for whatever comes next.

It takes guts to leave a business. But I have seen some talented executives leave newly sold commercial printing businesses. Some make fresh starts with private-equity groups who are acquiring label and packaging companies.

The highest offer isn’t always what’s best for the future of the seller. If it were up to me,  I would have accepted the Atlas Holdings offer because they were most likely to bring in fresh talent that wanted to grow the company over the long haul. Chatham seemed to be playing defense, trying to save the company with financial moves that would keep shareholders happy.

Atlas seems to be more of a strategic buyer. They recognize that  RRD’s customers are changing. Big, creative digital branding agencies such as Omnicon are building teams of suppliers that can help global brands execute increasingly complex, data-driven, multi-channel communications.  Reuniting RRD with LSC Communication would have been a powerhouse move that would offer digital branding agencies a one-stop source of integrated digital and printed communications.

Smaller firms have jumped at the chance to take business and talent away from RR Donnelley. RRD customers can’t be too happy about how this bidding war has played out. Now, competing companies are reaching out to offer RRD clients more certainty and stability in an  already unpredictable post-COVID era.

What Would You Do?

Investment companies view deals much differently than business owners do. So I give LaManna Consulting Group clients the same advice my father gave me when we sold our family business, the Vomela Specialty Company.

If you ever get the opportunity to sell your family printing company to a private-investment group, you may not face the same constraints that a publicly owned company does. But at the end of the day, it’s all about making money.

In any acquisition process, pick the right horse to take your company to the next level. The highest offer might not always be what’s best for your employees, their families, and the legacy of the company you built.

Do you agree or disagree? What do you think of all of this high-stakes M&A madness in the upper echelons of the printing business?  Share your thoughts with me in the comments below.

Source: RRD to be Acquired by Chatham Asset Management for $10.85 Per Share in Cash