23 June 2019 Business

US courts step in to prevent $8 billion mega merger

The final consolidation in the North American market between Quad Graphics and LSC Communications is on hold after lawyers acting on anti trust legislation have issued writs to prohibit the deal.

The American Department of Justice has stepped in to block the proposed merger between two of the largest printers in the US.

QuadGraphics agreed terms with LSC Communications, previously the volume printing arm of RR Donnelley & Sons, in October to form an $8 billion company. The deal was expected to be completed around now, but that was before the DoJ issued writs under anti trust legislation.

It argues that the deal would vest too much control over magazine and book publishers in the hands of a single company, leading to price rises. “If this deal were allowed to proceed, Quad would dominate the markets for magazine, catalogue and book printing services and be able to raise prices and reduce quality at the expense of publishers, retailers, and, ultimately, American consumers,” says Makan Delrahim, assistant attorney general in the Justice Department’s anti trust division.

LSC Communications and Quad are described as the only two significant providers of magazine, catalogue and book printing services. They are relied upon by the country’s largest publishers and retailers to ensure that magazines and catalogues are produced on time, says the complaint. This structure has lead to a price war as each tries to fill capacity at the same time as volumes are ebbing away. A dominant company in the market would be able to impose higher prices, harming customer choice.

However, Quad is contesting this view arguing that a single strong company would bring benefits to publishers by allowing the printer to achieve greater efficiencies and so lower costs; that many other companies are able to print these jobs and because barriers to entry are low, others can expand their market presence with ease and that the real competition is not between printers, but between print and digital as channels for advertising messages.

Quad would have sought legal advice before going ahead with the deal, leaving complaints from publishers already struggling with digital competition and a decline in readership and sales as lobbyists to prevent the deal for fear that the combined business would use market strength to raise prices.

When the deal was announced last year, Quad put net synergies over two years at $135 million. And that the result would be a company able to make the strategic investments needed both in capital equipment and in further acquisitions. It was, said Quad Graphics’ chairman Joel Quadracci “a defining moment in Quad’s 47 year journey”.

“We have grown from a printer with a single facility to a global marketing solutions provider with a seamless, integrated offering that creates more value for all our stakeholders at a time of significant media disruption. Together with LSC Communications, we will create a compelling combination of talent, expertise and client technology to further fuel our Quad 3.0 marketing solutions transformation and strengthen the role of print – a proven and trusted media form in today’s multichannel world.”

He maintains that argument in refuting the DoJ’s action, pointing out that there are some 50,000 printers in North America and that neither Quad nor LSC accounts for more than 5% of the overall spend on print while Facebook and Amazon dominate the internet advertising market. “Our competition is not only other printers, but also other forms of media,” he says.

“Our goal is to make print a more effective and affordable media option to that of digital giants such as Google and Facebook.”

Under the terms of the deal, completion needed to be before 30 October 2019 after which either party can withdraw from the transaction. If it is terminated as the result of a final non-appealable order to prevent completion, Quad would have to pay LSC a “regulatory approval termination fee” of $45 million.

By Gareth Ward

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The merger between the two behemoths of US printing was celebrated at the end of last year as the logical conclusion to a lengthy process of consolidation. Now the US Department of Justice is to raise objections to the deal in court.

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