COMMENTARY: Tribute on Merger Talks Breakdown

Earlier this week the following article appeared in a Reuters news release: manroland, the world's second-biggest maker of printing presses, has called off merger talks with Heidelberg due to poor financial results at its troubled larger rival, three sources familiar with the matter said. “Under the circumstances it is not defensible in view of the responsibility that manroland has to its customers and employees,” one person told Reuters on Monday. manroland's majority owner Allianz Capital Partners and minority partner MAN didn't like what they saw in due diligence, the source continued. “The deal would make sense in principle but not at the current moment and certainly not in 2010 — perhaps more in the mid to long term. There is no belief in the possibility of financing it,” another source said. The person said one reason was Heidelberg's warning late on Friday that sales and orders would remain below its expectations, leading to an operating loss that could as much as triple over the previous fiscal year that ended in March.”

Don’t you just love these anonymous quotes, particularly when later in the article it stated, “Heidelberg, manroland, MAN and Allianz declined to comment.” Well if manroland and Allianz declined to comment who the hell is making the above quotes!

When I read this my first thoughts were that if manroland or Allianz were surprised that Heidelberg’s sales and orders would remain below expectations, then do they really understand the current state of the market. Are they telling us that manroland is having a great fiscal year and that their sales and orders are going to be above expectations. Far from it and I’m sure that the figures of manroland are just as or more depressing than those of Heidelberg. So don’t try to kid me that this is the reason that Allianz and MAN are pulling the rug from this deal at this time.

I decided I’d call Heidelberg who I know pretty well. They told me that unlike manroland who are a private company, that Heidelberg as a publicly quoted and listed company couldn’t comment on such a situation. So I thought that I’d look at this and give my opinion on what may be happening.

One has to consider that Allianz came into manroland some years ago when MAN was largely divesting of its ownership in what was then MAN Roland. My view is the venture fund side of Allianz thought it saw the opportunity to rapidly capitalize on an investment in the new manroland on the basis of a rapid move to float the company or sell it on. Venture funding companies are always looking when they go into an investment to what are their options in the future are to get out of the investment with a profit. I personally thought their due diligence at the time was very flawed if they saw a real profit opportunity in becoming the major shareholder in manroland. The market was already going down at that time and Heidelberg had already started its move into the VLF sheet fed press area where MAN Roland was the major player.

The recession coming soon after this investment did not help and we soon saw the major offset press manufacturers getting into difficulty as orders slowed up. For manroland it was particularly difficult as it was the market leader in newspaper web offset presses and no area of the publishing and printing market has been as heavily affected as newspapers.

Meanwhile Heidelberg had introduced its VLF sheet fed presses aimed at the profitable packaging market, and from what I understand it has in terms of orders taken over market leadership in this area, to the detriment of manroland.

This brings me to the subject of the merger. Major over capacity in press manufacturing, particularly in Germany, while at the same time as a real drop in order intake, made everyone in the industry and its financiers sit up and think. The concept of a merger between Heidelberg and manroland made a lot of sense particularly if some operations could be spun off. The logical spin off was the manroland sheet fed division, as Heidelberg was by far the leading player in the market. manroland however is the leading player in the web offset area for both commercial printing and newspapers. It was a logical blend if someone could take on the manroland sheet fed press business. Speculation was that the company to do this would be Shanghai Electronics, but they were seriously tied up in investing to be the second largest shareholder in the Goss web offset business. One has to wonder why it was thought they would be a suitable company to move into sheet fed offset when one of their main interests is in building up their inkjet business.

This brings me to the crux of my argument. I believe that for the merger to go ahead that a substantial investment would be needed to make it happen. Since that now appears unlikely to come from the sale of the manroland sheet fed business, the funding would have to come from the investors. Here is the problem. manroland has not been the get rich quick investment that Allianz had hoped for, and they certainly would not want to put in more money for a small share of the combined company. The briefing to Reuters that manroland were pulling out of the merger because of the lower than expected level of orders in Heidelberg is in my opinion to use the American term, pure BS. In fact from what I see, despite the lower level of orders in Heidelberg, the company has been successful in its cost reduction measures freeing up cash flow.

I am not a financial analyst but I do believe that this briefing has been malicious and aimed at getting better terms for manroland if discussions are to continue on the merger while depressing the equity value of Heidelberg to change the shape of a deal. I believe that Reuters were naive in the way they reported the situation without taking account of what is really happening in the market and in particular in the manroland business.

By Andy Tribute, Contributing Editor to WhatTheyThink. Reprinted with Permission from WhatTheyThink. Copyright 2009. All rights reserved.