Burning money

Australia’s printing industry has not been a happy hunting ground for private equity. Three of the largest printers in the land – Blue Star, Geon and Opus Group – have all underperformed for the private equity (PE) owners. The first was sold last year at a bargain basement price, representing millions in losses by owner CHAMP. The second collapsed in destructive style, with private equity backer Gresham out of pocket many, many millions. The third has seen its share price lose more than 80% of its value since it floated last year.

Here’s how PE companies work. Private investors contribute to an investment pool that is managed and run by the PE company. The total pool is then used to invest in one or a series of companies, many of which could be underperforming. By definition, PE firms are equity investors. That means one thing: they make money only if they improve the performance of the companies in which they have invested.

Over the years, there have been some famous private equity success stories. One example came when Ford sold Hertz to private-equity investors in 2009 for $14 billion. Less than a year later, the PE firm floated the company at an equity valuation of $17 billion.

There have also been some notable failures. Terra Firma, for example, emerged out of its three and a half year ownership of record label EMI with a $2.7 billion loss, probably the single largest private equity disaster ever.

Not a good fit

The losses among printing investors have likewise been eye watering. This has led many to question whether an industry as fragmented and as challenged as print is suited for the investment disciplines of private equity. Some in the printing industry say the two just don’t go together.

But the PE players say that’s not fair – the print industry is challenging every type of investor. Sure, PE firms have lost money but print entrepreneurs and business owners have also taken a bath. Private equity companies claim they could do well in print, providing they have the right model and a suitable balance sheet.

Still, the examples of private equity’s difficulties in print are telling. CHAMP, for example, acquired Blue Star in 2006 for $NZ385 million (A$305 million). After years of poor performances, the PE firm wanted to exit the investment. When Blue Star was broken up and sold in 2012, it netted about $45 million. Over those difficult six years, the print group may have contributed some returns to its PE masters, at least in the early days, but CHAMP also poured good money after bad into the troubled investment. It seems safe to guess at a loss in the hundreds of millions.

CHAMP had lost a packet, but that did not deter other PE funds. When Geoff Selig acquired Blue Star’s Australian operations, the deal was part-financed by Wolseley Private Capital. Across the ditch, Tom Sturgess secured part funding by Mercury Capital.

The other big loser in printing was PE firm Gresham. The company is half owned by Wesfarmers. Gresham bought a controlling interest in the Pacific Print Group in 2005, and rebranded it as Geon in February 2007. It rolled up companies on both sides of the Tasman but Geon struggled to perform. In 2011, after repeated losses, Geon had to restructure its debt load. But that was not enough. It continued to wipe value off Gresham’s investment. Gresham wanted to get out.

A joint venture of US fund KKR and Sydney-based Allegro bought a portfolio of debt from the Bank of Scotland which included $80 million of Geon liabilities. Gresham cut its losses and exited in February. In an attempt to convert the debt to equity, KKR and Allegro tipped Geon into receivership, hoping to revitalise it by wiping the debt.

But the paper merchants, owned millions by the failed firm, decided enough was enough and refused to supply the new entity. It didn’t help that Geon had been known as a slow payer. It had few friends among suppliers in its time of need.

For many ProPrint readers, CHAMP and Gresham’s are synonymous with PE funding and the approach will always be tainted by those examples. But private equity has worked in other industries. In 2011, Super Retail Group bought sports goods retailer Rebel Group for $610 million from PE firm Archer Capital. Archer did well. Four years before, it had bought Rebel for $369 million.

Private equity pulses

PE continues to be an energetic sector in Australia. TPG Capital recently bought Australia’s biggest poultry producer, Ingham Enterprises, for a rumoured $880 million. Last year, KKR picked up a 63% interest in Genesis Care, which provides services to patients with cancer and cardiovascular disease. This was actually one of many healthcare sector deals by private equity firms, with TPG Capital and the Carlyle Group acquiring Healthscope in 2010 and Archer Capital buying Healthe Care Group, Australia’s third largest hospital group, from CHAMP two years ago.

Private equity tends to do well in industries that have stable and growing cash flows. Health care and food production would be two obvious areas.

When a private equity investment does well, the winners are typically the people who invested into the fund. Where it does badly, the investors, the manager, and potentially the banks are on the hook. It all depends on the specific circumstances of the transaction.

So what attracted private equity to print? According to a consultant, who asked not to be named, they don’t enter into print as novices but are brought in by partners who should know the industry.

“Many of the private equity business investments in printing occur as a funding partner for someone either within or with experience in the industry. Current participants are a good example, where ownership is a requirement alongside some bank or other debt,” says the consultant.

They get money out of it via dividends or coupon payments, or ultimately a final exit, preferably at a profit. They are typically looking for a return of 20-30% a year. After a PE firm buys a company, it will run it – sometimes hands-on, other times hands-off – and seek to improve the business. Some do it by cutting costs. Others put in capital. They then sell the business at the end of their holding period. This could be anywhere from a couple of years up to six or seven. 

The money comes from institutional investors, institutional super funds and endowment funds. Banks will help provide debt financing to the companies but banks tend not to invest in private equity managers themselves.

Down but not out

The consultant says PE players are still attracted to print, despite the losses, for one very good reason: the market is in such bad condition that the prices can be a bargain. “The entry price is now a significantly lower multiple than before. The price is extremely cheap for the assets than it was before.

“Private equity invested in print at very high multiples in a declining market. Emerging technology has caught up with the print industry, not just private equity businesses. Most firms relied heavily on existing management to run the day-to-day operations in businesses that had been purchased separately. They failed to consolidate these businesses into a single operating business as a priority, and when the market turned, keeping the businesses on the same path proved to be difficult.”

Phillip Bower spent a year as managing director of Blue Star, and helped manage the sales process. He says private equity can work in any industry but there were some features of the print sector that made it particularly challenging. The biggest problem was debt.

Bower, a former managing director of private equity firm Unitas Capital, says: “What’s happened in printing is that since the GFC, there has been a significant fall in demand. You’ve got businesses that are essentially very good but the amount of debt on the balance sheet in the expectation that the market would remain at a high number was such that both Geon and Blue Star were crimped in terms of the options they could pursue.”

But isn’t private equity to blame for that? Didn’t private equity borrow that money and rack up those debt levels? Bower says you need to see it in context.

“Normally you don’t get industries that decline to the level printing has,” he says. “If you buy a beverage company, people will keep on buying beverages. So you make forecasts of earnings and forecasts of cash flow and you keep on keep paying it off and you do fine. In the printing industry, all of a sudden you found that the market declined 15-20% per annum.

“At the time the deals were done, I don’t think the market was in decline. There was long-term structural decline but nothing like the degree after the GFC. With technological change over the past four or five years, the rate of change is much more dramatic than anyone would ever know.”

In the mid-2000s, when no one saw the GFC coming, PE funds saw opportunities in creating scale in the fragmented printing industry. Bower says this is one reason why they were prepared to pay such a high price for the investments.  “There was an opportunity to create shareholder value by putting together some businesses and creating synergies.

“The second reason, certainly in the case of Blue Star, was that they were introducing new technology – digital technology, not only in terms of printing kit but also in terms of the processes they applied in terms of how they manage the print production process,” he adds.

“Those efficiencies would then flow through to reduced costs, better market position and meeting customer needs, which would increase earnings. I would imagine private equity had a view that by putting together a bunch of businesses, there were synergy opportunities in the revenue and cost line and introducing new technology could do two things – better meet customer needs and take costs out of the business.”

But Bob McMillan, a 46-year industry veteran who made a packet selling McMillan Print to CHAMP-backed Blue Star in 2007, says private equity and print are just a bad mix.

“It would have to be seen that private equity are not good owners of print companies. I’m firmly of the opinion that private equity and printing are two things that do not go together,” McMillan says.

“What they don’t understand is you have got to have a good team in the business who understands sales and marketing and these people don’t.

“I have estimated this whole thing has cost a billion dollars. That’s everybody with the money the banks have lost, what private equity has lost and what the creditors have lost and all the interest
that hasn’t been paid.”

One size doesn’t fit all

McMillan says PE fails to appreciate that printing is a unique business with bespoke products that each require a lot of handholding. “They forget that printing is a personal thing. When you’re producing cans of drink or food, you are making these things over and over again, but in printing, every job is virtually new and different. You have to understand the manufacturing process that lies behind it. Every job is a different job and it’s a different business.”

That’s why staff are so important – they know the products and they understand the true costs. But, McMillan says, PE funds “have the habit of getting rid of anyone who knows what they’re doing”.

PE players say you can’t pin all the blame on them. What has happened at Geon and Blue Star has happened all over the industry, albeit on a smaller scale.

Joel Thickins, associate director of CHAMP Private Equity, says: “I don’t think it’s accurate to say if things are suited or not suited. It just depends on the circumstances. It’s clearly been a difficult period for a variety of people in the sector, private equity and individuals.

“There are quite a few examples of companies that were owned independently that have either gone into receivership that might not have been as a high profile as the private equity ones but I think it’s more a function of print as a sector and some of the cyclical and structural changes that are affecting the industry.

“Look at how the Australian and New Zealand print companies have performed over the past four to five years. Many companies have struggled that were owned by entrepreneurs, owned by long-term family companies and owned by private equity. While it makes for good reading in ProPrint, I don’t think it’s so much a private equity play.”

Chester Moynihan, managing director of Australian-based Allegro, which invested in Geon, says private equity could work with print, as long as the debt could be contained.

“It’s not suited to highly leveraged transactions,” Moynihan says.

“Here you have a business which is highly operationally leveraged – which printing is, you have high fixed costs with a printing press, essentially you have a factory. Also, you have to keep a certain number of people employed: more high fixed costs. That style of business really doesn’t suit itself to financial leverage.

“The new models that are emerging are lowly leveraged or no leverage, which is what we were looking at [with Geon]. We weren’t looking at putting any debt into this business and that – along with a lot of hands-on expertise, which what ourselves and KKR were going to bring – would help make it a better business.”

 


 

Private equity in print

Gresham

• Geon, 2005-2013

CHAMP

• Blue Star, 2006-2012

• Ooh Media 2012-current

Knox Investment Partners

• Opus Group 2007-current

Allegro

• Geon 2012-current

KKR

• Geon 2012-current

Mercury Capital

• Blue Star New Zealand 2012-current

Wolseley

• Blue Star Australia 2012-current

• Next Media 2007-current

Maui Capital

• BJ Ball 2011-current

Helmsman Capital

• Chippendale Printing 2008-2010

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