LSC, Quad terminate $1.4 billion merger agreement

LSC Communications, Inc. and Quad/Graphics, Inc. announced they have mutually agreed to terminate the merger agreement where Quad would acquire LSC in an all-stock transaction valued at approximately $1.4 billion. The all-stock transaction was announced Oct.31, 2018, and was approved by company shareholders Feb. 22, 2019. In June, the U.S. Department of Justice sued to block the acquisition, and this month the U.S. District Court for the Northern District of Illinois set a litigation schedule that includes a trial that would start in mid-November at the earliest and that would not result in a decision on the merits until 2020.

The parties have determined that the added delay, uncertainty and cost of legal challenges would have likely eroded a considerable amount of the expected benefits of the merger, according to Quad press release. As required by the merger agreement, Quad will pay LSC a reverse termination fee of $45 million.

“Quad’s commitment to our clients, shareholders and employees, and dedication to preserving a vibrant print option that can compete in the digital age, were driving forces behind this business combination and aligned with our long-term business strategy,” said Joel Quadracci, Quad chairman, president and CEO. “We are disappointed by the Justice Department’s decision to sue to block the transaction and believe that the lawsuit does not reflect the dynamics of print today and the competitive effect of digital media. However, rather than devote time and resources to prolonged litigation, we are choosing to focus on ensuring that our clients benefit from our Quad 3.0 growth strategy through exciting innovations in printing and integrated multichannel marketing solutions that reduce complexity, increase efficiencies and enhance marketing spend effectiveness. We believe this focus is in the best long-term interest of all our stakeholders.”

“We disagree with the DOJ’s conclusion regarding our transaction, especially in the context of industry trends,” says Thomas J. Quinlan III, LSC’s chairman, CEO and president. “However, we and Quad recognize the significant additional time and resources that would be required to challenge the DOJ’s complaint and have therefore decided mutually that it is in the best interests of our respective companies to terminate the merger agreement. The LSC Board of Directors and senior management are confident that LSC has strong capabilities to innovate and further develop our leadership position in the industry. We are incredibly grateful to all of our employees for their work throughout the process. We are as dedicated as ever to serving our clients’ needs with the same level of service, innovation and industry-leading solutions that they have come to expect. Moving forward, we will continue to drive shareholder value.”

Quad says it will continue to “execute on its strategic priorities to enhance Adjusted EBITDA and generate Free Cash Flow to fuel its Quad 3.0 growth strategy.” The company has diversified its strategic investments and integrated marketing solutions offering, including acquiring marketing services firm Ivie & Associates and creative agency Periscope; and acquiring a controlling ownership interest in digital agency Rise Interactive.

Concurrent with the termination announcement, LSC announced second-quarter financial estimates would be total net sales of $865 to $875 million and a GAAP net loss of $22 to $26 million. As a result, the company is suspending dividends.

“While our Book and Office Products segments performed in line with expectations during the second quarter, we have seen an unprecedented drop in demand in our Magazines, Catalogs and Logistics segment,” says Quinlan. “This faster pace of decline in demand in the MCL segment results primarily from the accelerated impact of digital disruption of demand for printed materials. As a result, we are updating our 2019 full-year guidance and expect our year-end reported leverage to be approximately 3x.”