TEXT-S&P puts Quad/Graphics 'BB+' on creditwatch negative
Oct 12 - Overview -- U.S.-based printing company Quad/Graphics Inc. has entered into a preliminary agreement to acquire substantially all of the assets of printer Vertis Holdings Inc. -- We expect the acquisition to weaken Quad's EBITDA margins for the next two years. -- We are placing our 'BB+' rating for Quad on CreditWatch with negative implications. -- The CreditWatch listing reflects the likelihood that we will lower our rating on the company by one notch if the acquisition closes under the currently proposed terms. Rating Action On Oct. 12, 2012, Standard & Poor's Ratings Services placed its ratings on Sussex, Wisc.-based printer Quad/Graphics Inc. on CreditWatch with negative implications. This includes the 'BB+' corporate credit rating and all issue-level ratings on the company's debt. Rationale This rating action follows the company's announcement that it has entered into a preliminary agreement to acquire substantially all of the assets of printer Vertis Holdings Inc. for $285 million ($170 million net of current assets, or about 3x estimated 2012 EBITDA). To facilitate the sale, Vertis will file for Chapter 11 bankruptcy protection. As part of the bankruptcy process, Vertis and the bankruptcy courts must evaluate all competing bids for the company--so Quad may not ultimately acquire the company. If, however, it becomes clear that Quad's bid will be accepted and the proposed transaction will close, we could lower our rating on the company by one notch (to 'BB'). We believe the acquisition would weaken Quad's business risk profile by increasing its exposure to a poorly performing company in a sector already under secular decline. Vertis will require significant management attention to be integrated efficiently with Quad. As a result, we expect Quad's EBITDA margin to be negatively affected over the next two years. We estimate that the company's margins will decline to about 12% from about 14% pro forma for the acquisition (this does not include synergies or restructuring costs to achieve these synergies). We expect the margin could be lower over the first one to two years after the acquisition's close, as restructuring costs would exceed synergies. At the same time, we believe that Quad will continue to face negative structural trends and economic pressures that the proposed acquisition and ongoing operational restructuring will only partly offset. We view Quad's business risk profile as "fair" (as per our criteria), based on its size, operating efficiency, and profitability--notwithstanding the difficult fundamentals in the printing industry. Industry trends include keen competition, fragmentation, intense pricing pressure, declining demand in key end markets, and significant revenue volatility over the economic cycle. We view Quad's financial risk as "intermediate," based on its moderate leverage. CreditWatch We will resolve the CreditWatch listing once resolution of the proposed acquisition becomes clear. If Quad closes on the deal under the currently proposed terms, we could likely lower our rating on the company to 'BB'. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List CreditWatch Action To From Quad/Graphics Inc. Corporate Credit Rating BB+/Watch Neg/-- BB+/Negative/-- Senior Secured BB+/Watch Neg BB+ Recovery Rating* 3 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.