SEE ALSO: Quebecor World to Change Name

The well-publicized letter sent by R.R. Donnelley to Quebecor World nearly a month ago expressing an interest in buying its assets has led to a cascading assumption throughout the industry that such a sale is a fait accompli.

But a comprehensive review of documents in the Quebecor bankruptcy case (there are more than 1,700 documents) and analysis of the terms Donnelley is offering suggest that there is less to the offer than meets the eye, and that the $1.35 billion Donnelley offer is not the best deal for Quebecor creditors.  

The review of the documents comes as the Quebecor World board of directors is expected imminently to vote on a response to the Donnelley letter.

An analysis of the publicly-available documents centers on three or four potentially deal-breaking elements:

•  Timing. Donnelley’s offer was made just weeks before creditors were to vote on the Quebecor reorganization plan, and two months before the scheduled emergence from bankruptcy. If the plan to emerge from bankruptcy is forestalled, creditors stand to go for weeks or even months past the expected mid-July exit without receiving any of the cash that may be coming to them as part of the restructuring.
•  Costs. The costs of the Chapter 11 process are close to $100 million to date and are mounting at a rate of several million per month. Also, $750 million in reorganization financing expires on July 21st. If the reorganization and emergence from bankruptcy proceed on schedule by July 10, then that money will be used. If not, it needs to be refinanced at a cost of tens of millions of dollars.
•  Terms. First, it appears there is no official binding offer, just a non-binding letter expressing interest. Second, Donnelley is proposing an asset sale, meaning that employees and liabilities such as unfunded pensions are not included.
•  Government regulatory oversight. The merging of the two largest printers in North America will trigger what is likely to be a lengthy antitrust review.

Interestingly, the Donnelley offer and the Quebecor reorganization plan have similar terms. Donnelley offered cash to creditors equal to what Quebecor World was offering—$700 million—plus cash on the balance sheet as of June 30, 2009, amounting to $257 million, plus 30 million shares of Donnelley stock. That represents about 15 percent of the total of Donnelley’s outstanding shares, with a value of about $394 million.

Quebecor’s bankruptcy offer is valued at about $1.5 billion, including the $700 million in cash and the rest in stock. (The total number of $1.5 billion is different because of the valuation of post-bankruptcy Quebecor stock.) Donnelley’s stated assumption is that its publicly-traded stock is more attractive to Quebecor World’s  creditors than the newly-issued securities of a new standalone company.

On the other hand, there is no acquisition premium other than that, making it the rough equivalent of the Quebecor reorganization plan and perhaps not providing enough incentive to the creditors. And premium becomes penalty when factoring in how creditors who are expecting to get cash in July are severely disadvantaged by having to wait weeks, or even months, to get paid.

Offer Not Appealing for Creditors?

QW’s creditors—mainly bank and bond debt held by a number of private equity firms—also would have to reconcile several massive new costs under the Donnelley offer. Because it is an asset sale, liabilities are not covered. A Quebecor World liquidation analysis shows a pension plan underfunded by some $392 million, a portion of which might be covered by the Pension Benefit Guarantee Corporation, an agency similar to the FDIC. But some of the pension money will have to be picked up by creditors, reducing their payout in an asset-only acquisition by Donnelley.

The Quebecor liquidation analysis also explores the exposure for the company should it have to terminate its 17,000 North American employees. Severance costs, the document indicates, would total about $360 million. That number would be roughly applicable in a Donnelley sale if one assumes that Donnelley won’t need Quebecor plants or people. And Donnelley possesses capacity in its existing operations to absorb perhaps as much as 80 percent of the Quebecor business without affecting its current schedules, and the rest with schedule adjustments. Quebecor creditors would be faced a major hit on severance in an asset acquisition by Donnelley.

More than that, the Quebecor disclosure statement suggests that should many Quebecor plants be closed in an asset sale the company would face a high cost in customer-damage claims. This is especially true because Donnelley states in its letter of interest that it would only retain “specific” contracts from Quebecor.  

Then too, if an asset sale goes forward, it would have to clear regulatory terms under the Hart Scott Rodino Act, which provides for FTC and Justice Department antitrust review of mergers and acquisitions, and provides a complex formula that looks at marketshare of combined companies. In the case of these two printing giants, geographic locations, plus markets including commercial print and publication printing, would come into play. Such a review could take six or more months.

For Quebecor’s creditors, a six-month review with no guarantee of approval at the end would seem less than appealing.

Those six months would be clouded with uncertainty, affecting sales and retention alike.