Quad/Graphics (QUAD 16.89, -1.36, -7.5%) makes worse than two-year lows following the third quarter earnings miss and news that the company would buy print and digital media services peer LSC Communications (LKSD 10.45, +1.96, +23.1%) in an all-stock deal.
The LKSD deal combines the two largest publication printing companies in the world in a combination valued at about $1.4 billion. The all-stock deal is expected to close in mid-2019, and be accretive to earnings, excluding non-recurring integration costs. Net synergies are expected to be around $135 million, and will be achieved in less than two years and result in substantial additional Free Cash Flow generation.
Specific terms of the deal are that LKSD shareholders will receive 0.625 shares of Quad Class A common stock for each LKSD share they own, representing about 29% total economic ownership of the combined company and approximately 11% of the vote of the combined company.
Based on the closing share prices of both companies on October 30, 2018, the merger consideration represents a premium of 34% to LKSD shareholders. Quad shareholders will continue to own Class A and Class B shares, representing approximately 71% total economic ownership of the combined company and approximately 89% total voting power of the combined company.
QUAD also reported worse than expected Q3 earnings per share (EPS) of $0.45 on revenues which came in slightly better than expected at $1.03 billion, up about 2.4% versus last year’s Q3. The company also achieved non-GAAP adjusted EBITDA and margins of $105 million and 10.2%, respectively.
Q3 net sales increased 2.4% reflecting the impact of the Ivie & Associates and Rise Interactive investments. Organic sales declined 3.2% after excluding acquisition sales impact of 4.6%, increased pass-through paper sales of 1.6% and a 0.6% unfavorable foreign exchange impact. The organic results reflect ongoing print industry volume and pricing pressures and are consistent with the company's expectations.
Management also narrowed 2018 net sales to approximately $4.2 billion from the previous range of $4.0-4.2 billion. Also, the company now sees adjusted EBITDA of $410-430 million from the prior $410-450 million range for the year on free cash flow of approximately $200 million from the prior $200-240 million outlook.
QUAD shares are off their worst levels of the session, though still firmly lower into the afternoon after the M&A announcement and results. QUAD is poised to close October with about 18% losses while printing peer RR Donnelley & Sons (RRD 5.72, +0.91, +18.9%) cozies up to another solid session, up about 18%, after gaining 7.4% yesterday post earnings.