Quad Announces Deal for Worldcolor

SUSSEX, WI—One of the most compelling transactions in the history of the printing industry rocked a relatively serene M&A landscape when it was announced that Quad/Graphics had agreed to purchase Worldcolor—the second-largest printer in North America—and become a publicly traded company. But the move was as jaw-dropping as it was logical.

"This is a transformational event for Quad/Graphics, and we're excited about the opportunities our acquisition of Worldcolor will present our customers, shareholders and employees," said Joel Quadracci, chairman, CEO and president of Quad/Graphics, during an investor call after the announcement.

The combined company boasts aggregate sales of $5.1 billion for the fiscal year ending Sept. 30, 2009. Together, the firm will have nearly 30,000 employees, though that figure is expected to decline during the integration process. The deal, announced Jan. 26, is expected to close during the second or third quarter and be accretive to the earnings of the combined enterprise.

How much is the deal worth? The Wall Street Journal, quoting sources familiar with the transaction, pegged the price tag at $1.3 billion to $1.4 billion. Last June, RR Donnelley's unsolicited cash-and-stock offer of $1.56 billion was rejected by then-Quebecor World, which was seeking to exit from bankruptcy protection.

Quad/Graphics' management believes the deal will generate US$225 million in pre-tax net annualized synergies within 24 months.

Under terms of the acquisition by Quad, Worldcolor shareholders will receive approximately 40 percent of the outstanding shares of Quad/Graphics at closing and Quad/Graphics shareholders will hold approximately 60 percent of the shares. Worldcolor common shares will be converted after a multi-step transaction into Class A shares of Quad/Graphics, at a share exchange ratio to be determined at closing. Worldcolor convertible preferred shares may either be converted to Worldcolor common shares or redeemed for cash at $8 per share.

The deal isn't contingent upon financing conditions; Quad has already lined up $1.2 billion in committed financing from JPMorgan Chase and U.S. Bancorp to fund cash distributions, refinance its existing revolving credit facility and refinance Worldcolor's existing outstanding debt, among other things. The two companies have $1.7 billion in combined debt.

Quadracci—whose late father, Harry, founded Quad/Graphics in 1971—will spearhead the firm as chairman, CEO and president. Mark Angelson, CEO of Worldcolor, will chair the Quad board committee on integration and consolidation, and will become a director prior to closing.

"This is the most compelling transaction with which I have been associated and is the occasion to pass the torch of leadership to a new generation in our industry," said Angelson, a veteran from several high-profile printing concerns over his lengthy tenure within the industry.

The acquisition will enhance Quad/Graphics' position as a commercial printing leader in North America serving the magazine, catalog, retail insert, book, directory and direct mail product segments. It will reportedly offer clients a more comprehensive range of services, including a broader variety of product types and revenue-generating solutions; an enhanced manufacturing platform; and an expanded geographic footprint.

The deal also provides new opportunities to realize distribution efficiencies through 
improved speed-to-market and product integrity for USPS-delivered products and volume-driven postage savings programs, such as co-mailing. PI