Lynne Marek | Crain's Chicago Business | June4, 2016
R.R. Donnelley & Sons is splitting up, and the man who knows the 152-year-old company best is casting his lot with one of the new, smaller spinoffs.
Thomas Quinlan III, 53, who has been Donnelley CEO since 2007, will become chairman and CEO of LSC Communications, a $3.5 billion-a-year business serving Donnelley's retail and merchandise clients, when the 68,400-employee commercial printer atomizes into three parts in October.
The biggest printing company in America—and one of the top 25 corporations by revenue in Illinois—has been gobbling up rivals for a decade, amassing $11.26 billion in revenue last year. Now, however, it says different management teams focused on niches will yield more value for shareholders. That's the conventional thinking behind a trend that cleaved Abbott Labs, Kraft Foods and Motorola, too, but it won't change the declining demand and price competition battering the commercial printing industry.
“There might be advantages to splitting it up, but, in the end, the growth prospects are the same,” says Gimme Credit analyst Dave Novosel in Chicago.
The industry's revenue peaked in 2000 at about $165 billion and slipped to $160 billion last year, according to trade group Printing Industries of America, though the recent figure is inflated by ancillary services.
Donnelley, twice as large as the industry's No. 2, Quad/Graphics of Sussex, Wis., strides above a field of small shops. As the need to print catalogs, magazines, brochures and documents shrinks in an increasingly paperless era, all these competitors are lowering prices in a scramble to retain customers.
Donnelley's revenue has remained fairly steady over the past five years, fluctuating between $10.22 billion and $11.60 billion. Acquisitions helped the company buoy income and, at the same time, eliminate rivals, close plants and cut workers, all to lower costs.
Still, profit margins are shrinking. Exclude the benefit of the acquisitions, and the margin on earnings before interest,taxes, depreciation and amortization declined to 10.7 percent last year from 11.9 percent in 2011, says Charles Strauzer, an analyst at CJS Securities in White Plains, N.Y. Management says it will decline slightly again this year. “Printing has been in secular decline for years now,” Strauzer says. “When revenue is declining, you have to offset that with cost-cutting.”
In addition to LSC and the R.R. Donnelley core business, the split will create Donnelley Financial Solutions, with $1 billion in annual revenue. All three businesses will be based in the Loop.
R.R. Donnelley & Sons will be the biggest, with $7 billion in revenue and 42,000 employees, providing legacy printing services for direct mail, labels, forms, and other commercial and digital printing jobs. Donnelley Financial, the smallest, will focus on printing work for the financial, investment and legal industries, while LSC, with a headcount of 20,000, will cater to publishers, merchandisers, catalog companies and retailers.
“When the transactions are complete, each company will have an enhanced ability to focus more intently on its customers' unique needs,” Quinlan told analysts on the company's first-quarter earnings call in May. A Donnelley spokesman declines to make any of the post-spinoff CEOs available.
Spin-off Advisors contends that spinoffs unlock value, though mostly for the pieces spun off as opposed to those remaining core businesses. The best evidence of that is the Bloomberg Spin-off Index, which measures the performance of companies with valuations of more than $1 billion that have been spun off, says Joe Cornell, who leads Spin-off Advisors in Chicago. The index has jumped nearly sevenfold since it was created in 2003, compared with a more than doubling of the Standard & Poor's 500.
It's a bet that the companies individually are going to be better run, and it's a bonus if they're acquired at a premium, Cornell says. Typically, acquisitions don't happen for at least six months so as not to jeopardize the tax-free nature of the transactions, he says. Drugmaker Baxalta was purchased by Shire for $32 billion only six months after it was spun off from Deerfield-based Baxter International.
Donnelley shares jumped last year when the split was announced, rising to $18 a share on Aug. 4 from $16.98 the day before, but they've slumped 9 percent since then to $16.39 on June 3.
Gimme Credit's Novosel agrees that splitting up could create value, but he notes the company carries substantial debt of $3.43 billion that could be problematic if the economy falls back into recession. That may be part of the reason that Quinlan has cherry-picked leading LSC, the new business that will have the least debt—$800 million—relative to earnings.
To view the article on chicago business.com, click here: Donnelley CEO Quinlan to head spinoff LSC in company breakup