TEXT-S&P puts Quad/Graphics 'BB+' on creditwatch negative

Fri Oct 12, 2012 1:25pm EDT

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.