RR Donnelley Spinoff Comes Under Fire From Investor Group for 'Poor Performance'

Denali Investors Group sent a letter on June 5 to the board of directors at Chicago-based Donnelley Financial Solutions, an RR Donnelley spinoff, urging the board to form a special committee to pursue strategic alternatives in light of its poor financial and stock performance. It read:

Dear Members of the Board:

We appreciate the recent investor day you held in New York. However, as evident in the continued decline of your stock, the market and shareholders are not impressed with the progress or management's ability to communicate a clear path forward. The Board must be proactive in evaluating management and holding them accountable on their ability to navigate this valuable business and communicate effectively with the investment community.

The two year mark for the company's spinoff is rapidly approaching, and the stock is now down more than 47% over this period during which time the S&P 500 Index is up over 26%. The stock is valued at approximately 5x EV/EBITDA and 0.5x Price to Revenue, which is a massive disconnect from your competitors that range from 11x to 17x EV/EBITDA and 3.3x - 5x Price to Revenue. We believe the board must consider next steps for unlocking value, as the current plan is clearly not working.

As we have stated before, we believe Donnelley is worth considerably more than the current price and multiples imply, and that additional steps are needed to surface this value. As such, we urge the board to voluntarily form a special committee to seek strategic alternatives and commence a formal solicitation process that includes all potential strategic and financial suitors.

Sincerely,
H. Kevin Byun
Denali Investors, LLC

Daniel Lieb was an RR Donnelley exec before taking over at Donnelley Financial Solutions.

And longtime shareholder Groveland Capital sent a a similar letter to the Donnelley Financial Solutions board the following day. RR Donnelley (RRD) split up into three separate, publicly held companies on Oct. 3, 2016. The then-$11.7 billion conglomerate separated into RR Donnelley, LSC Communications and Donnelley Financial Solutions largely to "maximize shareholder value."

At the time, I wrote a commentary and surmised that Donnelley Financial Solutions "may prove to be the real crown jewel among the three entities." With 3,500 employees, 61 locations across 18 countries, and $1.05 billion in sales when the breakup occurred, I thought the provider of critical financial, investment and legal communications - led by President and CEO Daniel Lieb - was the best-positioned of the three spinoff companies from a competitive, less-commodity-driven market position perspective. 

I assumed that large companies, investors, financial analysts and Wall Street bankers seeking secure access to documents related to multimillion-dollar IPOs, M&A deals, due diligence, financing and raising capital, and corporate governance, would be most concerned with security, privacy and ease of access than they would around the pricing of its services.

Plus, Donnelley Financial Solutions layers on other supporting offerings, like language translations and data solutions. RR Donnelley's 2012 acquisition of EDGAR Online, the reporting engine for financial and regulatory filings for companies worldwide, provides Donnelley Financial Services with a huge repository of financial and company data that it can mine and make available to clients to aid them with their analysis and business decision-making. But, Donnelley Financial Solutions has underperformed, at least from a financial standpoint.

Where Wall Street Values the Three RR Donnelley Spinoffs

I guess, in some ways, it's all relative, though. Donnelley Financial Solutions is still being valued more highly than its spinoff counterparts, which dwarf it in annual sales. As of late morning June 8, Donnelley Financial Solutions' common stock was selling for $16.96, compared to LSC Communication at $13.25 and RR Donnelley at a mere $6.60. On the most recent 2017 Printing Impressions 400 (access the complete list here) of the top printing companies in the U.S. and Canada ranked by annual revenues, RR Donnelley was ranked No. 1, with most recent fiscal year sales of $6.9 billion; followed by LSC Communication, ranked Number 3 at $3.65 billion; and Donnelley Financial Solutions, at Number 9 with $983.5 million in its most recent fiscal year sales.

LSC Communications: Most Active on Acquisition Trail

LSC Communications CEO Thomas Quinlan has been the most acquisition minded since the spinoff.

Of the three, LSC Communications - led by former RR Donnelley Chairman and CEO Tom Quinlan - has certainly been the most active on the M&A front and in consolidating various print markets, especially the publication printing and distribution market. It acquired RRD's Print Logistics business in May 2018, third-party logistics provider The Clark Group and Cenveo's Quality Park Envelope in November 2017, as well as making the major acquisition of Publishers Press in September 2017. Those came on the heels of its surprise blockbuster deal to acquire Creel, and the purchase of Fairrington Transportation, both of which closed in July 2017.

It will be interesting to watch if Donnelley Financial Solutions also enters the M&A fray, either as a buyer or a seller. Perhaps it can turn to its own service offerings, if it does.

Either way, the spinoff of RR Donnelley into three companies, at least so far, has yet to achieve its lofty goals. With the Cenveo Chapter 11 filing in February - and the negative publicity surrounding Cenveo's management by the Burton family and its reorganization plan - it doesn't appear that now is a very good time to be a large, publicly-held company in the printing industry.