Financial Woes Rock Quebecor’s World —Michelson

IT WASN’T a very joyous holiday season for Quebecor World, North America’s second largest printing conglomerate. CEO Wes Lucas departed—fresh on the heels of his company’s plan to sell its 18 European facilities to The Netherlands-based RSDB Group for $341 million ultimately being voted down by RSDB’s shareholders in December and Quebecor World pulling the plug in late November on a refinancing plan to issue more shares due to weak market conditions.

The saga continues: At press time, Quebecor World reached a new accord with its lenders mandating that it obtain $125 million in new financing by January 15 and consumate a new transaction by month’s end that would reduce its current credit facility to $500 million by February 29. Any accord reached must also allow for the full repayment of its borrowing facility, as well as terminate its North American securitization program, both by June 30.

“The long and short of it is that [Quebecor World] must raise nearly $1 billion in new financing within six months,” wrote Genuity Capital Markets analyst Carl Bayard, which “is quite a challenge in light of the current credit enviroment.”

As we closed this issue, some speculated that Quebecor World’s parent, Canadian publishing and media giant Quebecor Inc., would swoop in and provide a cash infusion, at least the $125 million covenant to avoid bankruptcy. This would buy Quebecor World a little more time to consider its options, which include selling select assets or even unloading the entire company to a strategic buyer or private equity firm. Possible suitors mentioned in the financial press include competitors RR Donnelley and Transcontinental Inc. (even though Transcontinental issued a statement saying it’s not interested), as well as private equity firms Kohlberg Kravis Roberts (KKR) and Cerberus Capital Management. Various debt and equity analysts polled have placed the value of Quebecor World at between five and six times EBITDA, or roughly $2.3 billion to $2.7 billion.

Whatever the outcome, the company’s travails do seem to illustrate several truths:

Wall Street, customers and industry suppliers expect continuity from a senior management standpoint. The naming of current CFO Jacques Mallette to replace Wes Lucas reportedly marks the sixth person—including Pierre Karl Peladeau (son of the late founder) himself—to fill the CEO post at Quebecor World since Charles Cavell retired in 2003. A revolving door leading to the executive office shouts out the fact that a distressed company is unable to get back on track, and naming a new CEO, in most cases, does little to improve its predicament.

As a side note, due to the sheer size of Quebecor World, its financial woes are causing a ripple effect in the marketplace. With all of the bad publicity and subsequent concern by clients over its future, the printer reportedly has had to slash pricing in order to maintain existing business and to gain new contracts. This has intensified pricing pressures on its competitors—often in print markets already grappling with low margins, escalating paper prices and higher postage costs. Potential insolvency also impacts existing and future agreements for capital equipment upgrades and consumables expenditures.

Industry consolidation will continue, but combining large enterprises can create new pitfalls and surely does not guarantee success. It’s been often said that making an M&A transaction is the easy part; the hard part is integrating various operations and melding different cultures, i.e., Quebecor with World Color, on a grand scale. Over these past several years, Quebecor World has been dogged by several inefficient facilities with outdated equipment, labor unrest within its European operations and falling stock prices.

Quebecor’s printing unit dates back more than 50 years and has been an integral part of the company’s overall success. The overriding question: Will the parent come to the rescue of its foundering child, or let business be business and take down the shingle?

Mark T. Michelson