Although R.R. Donnelley & Sons Company (RRD) confirmed that the acquisition of Bowne & Co. Inc. (BNE) as announced on February 23, 2010 will be completed in 2010 (as previously expected), the termination date of the merger between RR Donnelley and Bowne has been extended from October 23, 2010 to January 23, 2011. This will provide the company with more time to examine and review its acquisition of Bowne & Co. under the Hart-Scott-Rodino Act.
On May 12, 2010, Donnelley announced that it has received a request for additional information from the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act. Therefore, the completion of the transaction depends on the expiry or termination of the waiting period under the Hart-Scott-Rodino Act and other customary closing conditions.
In February 2010, R.R. Donnelley had announced that it would acquire Bowne & Co. for approximately $481 million in cash, or $11.50 per share. The offer price of $481 million represented a 65% premium to Bowne’s closing price of $6.97 on February 23. RR Donnelley and Bowne continue to expect the transaction to close during 2010. The acquisition of Bowne will be accretive to R.R. Donnelley’s earnings in the first full year after the close of the transaction.
Donnelley is the largest printing company in the U.S., providing various global printing services to a wide variety of businesses worldwide, as well as related services such as logistics and distribution for print customers and mailers.
R.R. Donnelley is actively engaged in making strategic acquisitions to enhance its geographical presence, boost its global outsourcing business and expand product and service offerings. Since 2007, the company has acquired 8 companies.
Bowne has operations in North America, Latin America, Europe and Asia and offers digital one-to-one printing services for healthcare, transactional communications, financial services, marketing communications and other applications.
The acquisition of Bowne would expand and enhance R.R. Donnelley’s offering to its current customers, while also creating an opportunity to provide its products to Bowne’s clients. We remain positive on the acquisition of Bowne. We believe the company’s continued focus on acquisitions will spur its already dominant market position and drive long-term growth.
While Donnelly continues to acquire a large number of companies, which improves revenue opportunities, it adds to integration risks. Further, the company’s ongoing acquisition may continue to stretch its borrowing capacity.
Although the company has been successful in acquiring companies, we believe the delay in the acquisition of Bowne could be an overhang in the near term.
Our Take
R.R. Donnelley’s second quarter 2010 results beat the Zacks Consensus Estimate, aided by lower operating expenses and increased volume. The company is witnessing stabilization in demand; however, foreign exchange movement is expected to create significant headwinds to 2010 revenues.
As a result, the company expects revenue growth to be just 1.0% year over year in 2010 versus the previous expectation of a growth in the low single-digit range. The company’s cost containment efforts, operating leverage, aggressive acquisition policy, debt repayment initiative, impressive cash flow and stable dividend payout (6% yield) will leverage growth. Moreover, a cyclical recovery in advertising, growth in logistics and digital business, broadening customer base and new product launches are long-term drivers of growth.
Despite incremental challenges in the printing industry, Donnelley is an important player in the printing industry holding a large market share with strong fundamentals and various competitive advantages due to its large scale of operations.
However, the company’s highly leveraged balance sheet, increased competition and rising pricing pressure may limit growth in the near term. Although the company expects demand to stabilize and consumer spending to improve this year, we expect a slow recovery in its results in 2010.
We therefore rate the stock at Neutral over the long term. Currently, the stock has a Zacks #3 Rank, implying a short-term Hold rating.
DONNELLEY (RR) (RRD): Free Stock Analysis Report
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