Listing on the stock exchange is one sure way to raise capital for print companies – at least those at the big end of town. Because they are so capital intensive, it’s a tempting proposition. But listing a company brings its own challenges, with shareholders expecting increasing returns and dividends every year.

Printing companies face the dual challenges of razor-thin margins and the need to invest in what is a particularly capital-intensive industry, with a premium on top-line machinery and technology. It’s not a recipe for easy profit rises, which makes a listed position all the more daunting. Firms that can’t demonstrate a good return on capital will be punished by the market. Some even say the fragmented printing industry, hit hard by the digital revolution and business being outsourced overseas, is not suited for listing on the stock exchange at all. The jury is out.

A handful of major print companies are on the ASX. The printers themselves are PMP (PMP), McPhersons (MCP), Salmat (SLM) and Wellcom (WLL), while on the supply side, Paperlinx is the most obvious example (PPX). Other related companies on the stock exchange would include outdoor advertising company Ooh Media (OOH) as well as print and publishing giants Fairfax (FXJ) and APN (APN).

For the most part, anyone who invested in these firms would have lost money over the past three years. In early 2008, PMP’s shares were trading at around $1.60. At the time of publication, they were worth around 37c. At the beginning of 2011, Salmat shares were valued at around $4.75. They have nearly halved to about $2.20. In the last months of 2009, McPhersons shares were worth just under $3.50 but now they are around $2. Wellcom trades at around $2.50. Back in 2007, they were around $3.40. The most extreme example is Paperlinx, whose shares have fallen under 10c, a shadow of the $3.50 they were worth in 2007.

Outdoor firm Ooh Media has bucked the trend. Its shares are trading at 32c, having doubled in value since November (some of that uplift might reflect the takeover bid by Champ Private Equity).

Backdoor listing

So with the industry’s track record with the ASX largely a case of shareholders losing value, would any printing company want to float? The short answer is yes: Opus Group is planning a backdoor listing through its “merger” with McPherson’s Printing. The wheels are in motion for the deal, which will bring together Opus’ Ligare book printing businesses in Sydney and New Zealand with the McPherson’s Printing plants in Maryborough and Mulgrave, Victoria.

The first step in the plan was to break the printing division of McPherson’s Limited away from the larger, more profitable consumer products business. The parent company’s shareholders have overwhelmingly – at 99% – approved the demerger. McPhersons’ retains its consumer business, which includes the Wiltshire, Stanley Rogers, Multix and Home Living brands. The path is now clear for the printing business, whose clients include Penguin and Allen & Unwin, to merge with Opus Group before listing as a separate entity.

Shareholders will vote on the merger in March, and if the resolution is successful, the McPhersons name will disappear from printing as the company is absorbed into the newly listed Opus Group. Prior to the vote, McPhersons warned that the inclement market climate meant profits were likely to drop by 20% across both its consumer and printing businesses.

McPherson’s Printing will officially be acquiring the Opus Group but Opus shareholders would hold a 70% stake, and the Opus name will eventually be above the door of the combined entity. The company will be backed by the private equity firm behind Opus Group: Knox Investment Partners. They will be on the board as will McPherson’s chairman, Simon Rowell. The firm will have offshore production through COS Printers in Singapore, wholly owned by Opus. The company also has strategic partnerships with printers in Hong Kong, Europe, the UK and the US. In that sense, the merger with a read-for-pleasure printing company like McPhersons might be a good fit.

Grand plans

Opus chief executive officer Cliff Brigstocke says listing Opus is the next stage of its growth strategy. The great advantage of listing the company is that it will be better able to raise cash for expansion and acquisition but Brigstocke says that is only one part of the story.

“It’s not to immediately raise funds,” Brigstocke says. “That’s part of a longer-term platform. We want to be in a position to raise funds for further acquisitions in particular but that’s not the only reason. In the early days, we did look for a potential listing either in New Zealand or Singapore but for us now, there was an opportunity to join forces with one of the other leaders in the industry, being McPhersons.”

Technology was another driver. Joining up with McPherson’s will give Opus access to the recently acquired HP T400 web press. Brigstocke confirms that inkjet is a key part of the Opus on-demand printing strategy. “We are very much big investors in technology across all of our divisions. We have spent several million dollars over the last few years in the out-of-home, government and publishing divisions.

“One of the things that attracted us to the deal was that both groups were looking at inkjet. McPhersons was slightly ahead of us in their implementation so we managed to achieve one of our major objectives in joining forces with them. They have an HP 400 being installed as we speak,” adds Brigstocke.

He is not too worried about the under­performance of printing companies on the share market. Opus, he says, is a different proposition.

“We take a longer-term view. To be honest, the share performance you’re talking about would not relate to where we are in the industry. We are a lot more around value add and business process outsourcing. To compare us against the share price of another major house isn’t quite accurate.”

He says Opus is in a good position for listing because it is not a commodity printer focused on the general commercial part of the market. “Around 50% of our revenue these days is coming from non-traditional print products.

“There is a lot more logistics. We are doing warehousing and distribution fulfilment. We have a call centre and do database management for clients. We run electronic publications and secure e-commerce applications on behalf of clients. It’s much more than traditional printing,” adds Brigstocke.

A sceptic might point out that PMP is likewise diversified across multiple channels, and yet it only recently announced an earnings downgrade. However, it is true Opus is in a different spread of sectors. With its Cactus Imaging business, Opus is active in the out-of-home niche, producing large billboards and other outdoor advertising such as bus sides and bus stops. The buoyant share price of listed out-of-home company Ooh Media is proof of the sector’s strength.

Opus also has a niche in government services with its CanPrint and Union Offset companies, both based in the nation’s capital.

“We don’t compete against a Geon or a Blue Star,” he says. “We are really in our own niches and that’s not in the high-volume, lower-margin end of the market.”

He says the McPherson’s deal would also provide funds for acquisition. Opus has made nine acquisitions in the past four and a half years. Being a listed company would give Opus a massive war chest for further acquisitions and Brigstocke says we can expect more of that. “I can’t give guidance or so say too much but with our track record, we have been acquisitive and that will continue.”

Cautionary tale

Still, the story of Paperlinx serves as a reminder of what can go wrong for a public company. Paperlinx was spun out of Amcor in 1999. At the time, the business was worth $900 million. But after years of Paperlinx reporting losses –  blamed on weak volumes and economic conditions in its key markets and a surging Australian dollar – its market capitalisation is now just over $40 million.

This is staggeringly low for a company that turns over more than $4.7 billion, even one that has been haemorrhaging profits at the rate seen at Paperlinx over recent years. With the market cap so depressed, the vultures are circling.

This came to a head at the very end of 2011. Paperlinx is now being courted by private equity. Two days before Christmas, Paperlinx chief Toby Marchant told the market that Paperlinx had received an incomplete and conditional proposal from an unnamed private equity firm. There are strong suggestions that the suitor is Los Angeles-based Platinum Equity, which has a track record in this industry with the takeover of Quark and was also seen sniffing around Manroland.

The circus surrounding Paperlinx has continued to ramp up. Andrew Price, the co-founder of print management giant Stream Solutions, has led a group of investors calling for Paperlinx chairman Harry Boon to resign and for Price to be appointed in his place.

Ups and downs

Price is well-versed in the ups and downs of the sharemarket, having sold Stream to ASX titan Toll Group. He remained in charge of the division following the Toll buyout. Price says there are some advantages to Paperlinx’s position as a listed entity. He says that being on the ASX gives Paperlinx the ability to raise capital, “once it is made profitable and the share price moves back up”.

He says being on the stock market offers the kind of stature required for such a large, global brand. “Suppliers are large listed corporations and elephants like to roam with other elephants,” he says.

Of course, one of the big disadvantages of being listed is when a company’s share price crumbles to the extent seen at Paperlinx, it leaves it open to a hostile takeover. Price says that if he is successful in his bid to take the top job at the paper merchant, “the focus will be to turn the business around, not give it away. Platinum Equity will be shown the door.”

Paperlinx is also coming under pressure from holders of its “hybrid” securities. These financial instruments have become an increasingly popular way to raise funds. For instance, when Woolworths recently undertook a hybrid issue, they were swamped, raising more than $700 million.

On a recent edition of the 7.30 Report on the ABC, Nigel Stewart, chairman of wealth management firm Stewart Partners, defined hybrid securities: “The characteristic of hybrids is a mixture of shares and bonds. They tend to have share-type characteristics of risk and volatility but they have bond-like returns.”

But this alternative strategy for raising capital could prove a millstone for Paperlinx as it mulls any form of merger or acquisition. The holders of Paperlinx hybrids are at the top of the preference list, and are due the first $285 million if there is any buyout. Considering they paid $100 per hybrid, and these were recently valued at $34, the hybrid holders are expected to prove a major obstacle to a potential buyout. It’s a stark warning for any listed company.

One Paperlinx investor in these preference shares, Graeme Critchley, set up website www.paperlinx-sux.com after shareholders were told at the annual meeting that preference investors would not be getting their expected $10.5 million in dividends. His website recently compared Paperlinx to Kodak, which filed for bankruptcy protection early this year. According to the site, Paperlinx, like Kodak, has been overtaken by market forces. “Kodak and Paperlinx are now both buggy-whip businesses for ostensibly different reasons; but the common and real reason is that of all business failures – poor management, as their respective markets changed dramatically over a short period of time.”

Critchley tells ProPrint that it has come down to a stoush between the ordinary shareholders and hybrid shareholders. Simply put, the ordinary shareholders want Paperlinx to battle on even though it has made losses for several years in a row and the hybrid shareholders want the company to take the private equity money and run.

“We think it’s the best chance for us to get our money in the next three to five years,” Critchley says.

He believes there is one big lesson here. “There are some things that shouldn’t be listed and printing might be one of them. It’s an industry that has gone through big change. It’s another industry suffering from our cost structures. Today printing is essentially a commodity. You can get jobs done in Singapore 30% cheaper than Australia. They use the same machines, the same ink and the same paper.”

Bond issues

The Paperlinx situation has echoes of the drama that unfolded last year at Blue Star, which trades its bonds on the New Zealand stock exchange. Payments on these bonds have been suspended for years due to Blue Star’s poor performance.

The issue came to a head last year when long-suffering bondholders were asked to approve a refinancing package under which senior lenders would extend funding lines, provide further liquidity and the ease back covenants – but at a cost. The bondholders were being asked to lose their preferential position. They were told the alternative was receivership. In the end, the deal was done on a knife’s edge, beating the requisite 75% mark by just 1.9%.

Scott Marshall, an analyst at Shaw Stockbroking, says the dynamics of the printing industry suggest it will always underperform. “The problems are that if you are going to get into serious printing, the capital costs are extremely high and the printing presses are very expensive,” he says.

“Most people are limited to commodity printing so your margins are slim.”

Adding to the problems, he says, is the fact that it can be a labour-intensive industry and cyclical. Also, it is a highly fragmented industry. Walk into any country town and you will find two or three printers. The listed printing companies have to compete against small local businesses embedded in their communities. Add to that the competition from copy shops like Kwik Kopy and Snap.

“You won’t get spectacular returns from printing,” Marshall says. “The dynamics are just not good in the industry.”

Listing on the stock exchange can provide benefits like capital for expansion. But any business contemplating it should have their eyes open. Chad Barton, chief financial officer of publicly listed Salmat, says there are challenges, particularly with stock market conditions now.

“There are pros and cons of both forms of ownership, but the equity capital markets are trading at one of the lowest points for valuations for any company that has large stakes in print businesses, which would suggest that it would be difficult to take a print business to IPO without expecting a significant discount,” Barton says.

“Within printing businesses, which are usually capital intensive, the equity capital markets are very focused on return on capital and how to grow the return on capital in a market that is viewed by analysts as being in decline.

“Additionally, fund managers and shareholders in this market are very focused on yield coming from dividend flows and how resilient these returns are,” adds Barton.

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