No cash is changing hands, but two of North America’s largest printing companies are making a trade, as Montreal-based Transcontinental will be taking over the majority of Wisconsin-based Quad/Graphics’ Canadian operations in exchange for its Mexican printing plants and a slice of its Canadian book manufacturing business.
In a deal that will require regulatory clearance from the competition bureaus in both Canada and Mexico, Transcontinental will take on seven Quad/Graphics (formerly Quebecor World/Worldcolor) facilities consisting of six printing plants and a premedia operation. The primarily web offset printing factories—focused on retail, magazine and commercial work—reside in Aurora and Concord in Ontario, LaSalle and Montreal in Quebec, Edmonton and Dartmouth. The premedia operation is in Markham, Ontario. Together the plants employ approximately 1,500 people and are, according to the companies, forecasted to generate approximately US$310 million of revenues in fiscal year 2011.
One former Quebecor plant that is not part of the deal is Quad’s facility in Vancouver (a region where Transcontinental also has a web offset printing operation).
In exchange Quad/Graphics will be taking over Transcontinental’s three Mexican printing facilities in Azcapotzalco, Toluca and Xochimilco. Transcontinental expanded into Mexico in 1998 where it currently employs approximately 900 people. The operation is forecast to generate $67 million for fiscal year 2011.
This comes less than a week after Quad announced a leadership change to its Latin American operations, appointing Tony Scaringi as president and GM of its Latin America portfolio, succeeding the retiring Guy Trahan (Trahan’s printing career dates back to 1985 in Canada with Southam, followed by a long tenure with Quebecor). Quad’s Latin American operations include plants in Argentina, Brazil, Chile, Colombia, Peru and Mexico.
In addition, Quad/Graphics will receive a portion of Transcontinental’s Canadian book printing operation—it’s black-and-white production that is destined for U.S. export, a $25 million business.
Last October, only months after closing its major acquisition of Worldcolor (formerly Quebecor World), Quad announced a reshuffling of its newly acquired Canadian assets, closing one Quebec plant and turning the Edmonton facility to a retail/catalogue-focused operation, shifting publication work to Ontario. However it appears the overall restructuring required in Canada was deemed too costly to pursue for the anticipated return.
In the announcement of the Transcontinental transaction Joel Quadracci, chairman, president and CEO of Quad/Graphics noted: ““To drive growth in Canada would have required a substantial capital investment. Canada is a lower growth, highly competitive print market with excess capacity. That market reality, combined with declining revenues and earnings, and along with the underfunded pension obligations of the Canadian business, makes Canada a less-compelling long-term value creation opportunity for us compared to Mexico.”
That leaves the cleanup of the former Quebecor World Canadian assets to Transcontinental, which includes the assumption of a defined pension liability of US$75 million, which the company suggests will be offset somewhat by acquired assets, tax benefits and real estate assets assumed in the transaction.
For Transcontinental the move is strategic, as Francois Olivier, president and CEO, indicated that with increasing competition in Canada, it was necessary to build on its existing platform. In a call with analysts he expressed concerns of U.S. printers entering the Canadian market, following along as major U.S.-based retailers make the move north. The current exchange rate is also favourable to the American-based firms.
Transcontinental does not seem concerned about gaining regulatory clearance under the Canada Competition Act for the transaction, claiming there is a lot of competition in the Canadian market. Certainly the company does operate a robust national network of retail flyer operations across the country, and it controls a lot of the commercial web offset horsepower in Canada, but possible incursions from American competition could offer a nationwide challenge.
The integration of the Quad Graphics Canada operations are projected to add some $40 million of net incremental EBITDA for Transcontinental over the next two years.
The deal is structured as two transactions: one with Transcontinental indirectly acquiring all shares of Quad Graphics Canada Inc.; and the other with Transcontinental selling its Mexican operations and transferring its black-and-white U.S.-bound book printing business to Quad/Graphics.
It’s anticipated that the transactions will close this fall.