CGX Acquisition on Track for R.R. Donnelley

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The R.R. Donnelley pending acquisition of Consolidated Graphics (CGX) recently received regulatory approval and is expected to close in 1Q14. The transaction is still subject to approval of CGX shareholders, who will receive $34.44 in cash and 1.651 shares of RR Donnelley per CGX share plus Donnelley’s assumption of Consolidated Graphics debt of about $98 million for a total estimated purchase price of $746 million, or $76 per share of CGX. Consolidated Graphics product line will expand many of Donnelley’s traditional print services as well as digital and commercial printing, fulfillment and mailing services, print management and ecommerce capabilities and other services.

With its 70 plants in local markets across 26 states, Consolidated Graphics serves primarily local customers, and could help Donnelley move into these markets. Also, Consolidated Graphics will reduce Donnelley’s exposure to declining product lines such as Books, Directories, Magazines, Catalogs and Retail Inserts, accounting for 28% of total sales in 2012 to an estimated 26% on a proforma basis. We also expect Consolidated Graphics to improve Donnelley’s revenue performance as Donnelley’s revenues declined from $10.6 billion in 2010 to $10.2 billion in 2012 while CGX’s sales rose from $991 million to $1.05 billion, a 5% increase over the comparable period.

For 4Q13, we project revenue of $2.69 billion, up 1.2% y/y, resulting in a 7% increase in operating income to $191 million, with EPS of $0.40 vs. our $0.45 estimate previously, down 7%, mainly due to the effect of the Consolidated Graphics acquisition. EBITDA for 4Q13 is expected to be $299 million, up 2% y/y. For 2013, we project revenue of $10.4 billion, up 2% y/y, in line with management’s guidance at a recent investor conference, with operating income of $721 million, down 4% y/y. EPS is expected to be $1.60 vs. $1.64 previously with EBITDA of $1.16 billion, down 6% y/y. Management recently projected free cash flow of $400 to 500 million for 2013.

For 2014, including Consolidated Graphics, we project total revenue of $11.4 billion, up 10% y/y, with operating income up 8% and EPS of $1.72 vs. $1.60 in 2013, including an expected benefit of some cost reduction measures and synergies. Proforma EBITDA is estimated at $1.32 billion vs. $1.16 billion. Donnelley print revenue is expected to be about flat y/y with growth in Services and Consolidated Graphics.

 

 

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