Behind the Ovato deal: the Print21 exclusive analysis

The successful deal to save what was the country's biggest print business, Ovato, has more plots and sub-plots than a series-deciding five-day test match versus India.

It is a story of business imperatives and personal relationships, acquisitions, and losses, all set against a rapidly evolving media landscape.

High-volume printer Ovato with its focus on catalogues and magazines was already facing a nine per cent decline in revenue in the 2019-20 financial year as the media environment continued its evolution, and that was before Covid smashed through in March. That then resulted in a precipitous 41 per cent drop in revenue in the rest of the financial year.

With a loss of $109m on sales down by $130m to $593m major shareholders the Hannans had to act. Ovato’s major markets, already under pressure, were suddenly looking shaky – its biggest customer Bauer stopped printing in New Zealand, and although Ovato rival Webstar had the contract, the closure sent alarm bells ringing over here, as Ovato had the Bauer Australia contract.

The noise from those alarms reached a crescendo when supermarket colossus Coles said it was stopping the 10,000-tonnes-a-year Australia letterbox catalogue. Again, it was printed by an Ovato rival, in this case IVE, but with Ovato having the equally large Woolworths catalogue, nerves, already on edge, were now jangling.

Then came the news that the end of the lease on the Victoria print site at Clayton would not be renewed – developers wanted the site. This then gave Ovato a choice: either set up a new greenfield site, or close Victoria, print in Warwick Farm where there was no shortage of excess capacity, and truck the product down to Melbourne every night. Under the circumstances the choice was a no-brainer, even though it would cost a quarter of the workforce their jobs.

Lorraine Cassin and the AMWU cried foul. They had already swallowed plenty of pride in enabling redundancy agreements to be renegotiated, but in reality, there was little option for the union; they were told it was either those 300 or the whole 1200.

Ovato execs led by chairman Michael Hannan and CEO Kevin Slaven presented a 625-page scheme to creditors, a scheme that meant those that had unsecured invoices would have to take 50c in the dollar. Paper companies were in for millions, and although those that had retention of interest clauses in their contracts are able to offset some of the pain, it will still make a major impact. They all voted to support the scheme.

A major plank in the scheme is the $40m cash injection, at least $35m of which is to be underwritten by the Hannans and its major customer magazine publisher Are Media. The two parties have saved Ovato.

When IPMG and PMP merged almost four years ago, the Hannan family became the largest single shareholder with 36 per cent of the company, a stake they have since increased. At the time of the merger the share price was around 27c, since then it has lost 99 per cent of its value. Fortunately, the Hannans are not just smart printers, and have most of their wealth outside print.

The other party is the country's biggest magazine publisher and Ovato's biggest customer Are Media, which is Kerry Packer's former publishing company. It is now owned by private equity fund Mercury Capital, the same fund that also owns Ovato’s main rival in New Zealand, Webstar, with its minority partner Tom Sturgess, who has a long history with Geoff Selig, the head of Ovato’s main rival in Australia, IVE.

Sturgess and Selig bought the Kiwi and Aussie parts respectively of what was the consolidated print empire Blue Star, from private equity fund Champ when it was staring down the barrel of a gun eight years ago – the duo effectively having their own Kerry Packer Alan Bond moment, buying back the businesses.

Then in June, while Ovato was seeing its sales plummet by 41 per cent, Mercury was buying what is now Are Media from German-owned Bauer Media. Mercury paid just a tenth of the $525m price Bauer paid James Packer’s ACP for it in 2012, the  price difference a stark illustration of just how far the landscape has changed.

Mercury bought Are just a few weeks after Bauer Australia bought its main rival Pacific Magazines, for $40m, not much less than Mercury paid for Bauer, with Bauer spending months unsuccessfully trying to wriggle out of the deal, which put 55 per cent of Australian and New Zealand magazines in the hands of the one new company

The upshot for print of the Mercury Bauer Are deal was that in New Zealand the Webstar presses now had work again, as the new owners rebooted the Kiwi magazine business, while in Australia the two biggest publishers were now one, but with the two major printers as suppliers. Bauer, now Are, magazines are printed at Ovato, while Pacific Magazines, now also Are, are printed by IVE, which is somewhat ironic given that Ovato’s predecessor PMP and Pacific Magazines were both once Rupert Murdoch stablemates and spin-offs.

Now the magazines are all owned by the same company, the stakes for Ovato and IVE shot up. Would Are Media place all its eggs in one basket, and if so which basket, or would it keep both printers as suppliers?

Mercury bought Are to resurrect the New Zealand business, and fill the gaping hole on Webstar’s production board caused by Bauer closing its New Zealand business. Buying the business meant it also now owns 55 per cent of Australia's magazines.

Sinec the deal went through printing has continued as it was in Australia, with both Ovato and IVE presses rolling for Are. Now Are Media is underwriting the deal to save Ovato. Why would that be? Well, Are has a contract with Ovato, and clearly values the service, and its top quality print on modern presses, but a key reason may be found in three words: Ovato Retail Distribution, the business formerly known as Gordon & Gotch.

Are Media, which publishes the majority of biggest selling consumer magazines, needs the distribution the Ovato subsidiary provides. It also needs the cash pipeline – newsagents pay Ovato Retail Distribution for the magazines they receive, not Are Media – it receives its payments later, from Ovato.

The deal is now going through, Ovato has been saved. Are Media will remain a major customer, and Australia will retain two major heatset print businesses. Almost every printer in the country has a view on the pros and cons of the deal, that view coloured by their relationship with Ovato, as client or competitor. One thing we hope, that this journey has a long way to go, for all of us.