Drowning in dosh - Print 21 magazine article

The flood of money from private equity players continues unabated and takeover activity is reaching new heights. At the same time, figures show that the printing sector is growing faster than almost any other industry so, by all accounts, we should be drowning in money. And yet it certainly doesn't feel that way. Simon Enticknap looks at where it's all gone.

The so-called 'global credit crunch' seems to have done little to slow the pace of private equity activity in the local printing market. Barely a week goes by without the announcement of yet another take-over or acquisition as the big two print groups, Blue Star and Geon, slug it out for supremacy. And it's not just those two that are getting into it in a big way; there are a myriad of smaller deals going on as well as players take up strategic positions in their particular markets to safeguard their futures. Even the region's biggest printer, PMP, itself not so long ago a target of PE interest, recently got in on the act by snapping up a rival heatset printer.

Against this backdrop of deals made and money changing hands, the recent ABS national account figures revealed that annual growth for the industry reached 8.5 percent by the end of June 2007 following another strong quarter of growth in which the industry grew by 1.5 percent. It was a figure that caught the eye and no doubt raised a few eyebrows as well, suggesting that the printing industry now has the second highest rate of growth of any manufacturing sector in Australia, beaten only by the metal products industry.

In fact, printing is one of the few manufacturing sectors to record any growth at all over the past year. Even outside of manufacturing, the printing industry recorded better annual growth figures than the much-vaunted mining industry on the back of which the nation is supposedly enjoying an unprecedented boom. Across all sectors and industries, printing is a star performer, comparatively small in size but very successful, punching way above its weight.

It's a remarkable figure, one worth celebrating surely, and yet no-one seems to talk about it or even acknowledge the fact that printing is enjoying a boom run. You'd think the suppliers, at least, would be out there, talking up what a great time it is to be investing in new equipment, taking advantage of the good times. But no, listen to this, that's the sound of a deafening silence. In part, it seems to be because no-one really believes that it's true. Talk to any number of printers, large and small, and you certainly don't get the impression that everybody is enjoying these halcyon days. Reports are mixed; some months are good, others are slow, nothing is secure or predictable. Life is hard.

As one printer put it: "April was a terrible month, the worst ever. Everything just seemed to stop for no reason and then the following month, it picked up a bit again. There seems to be no logical reason for it."
That's not what you want to experience when there are multi-million dollar presses waiting to be fed a constant stream of work. So what's going on? If the industry really is raking it in, where is all the money going?

Recession? What recession?
While the most recent quarter of positive growth marks the fourth in a row, it was only a year ago that we were announcing that the industry was officially in recession. This followed three successive quarters of negative growth during which production fell by nearly 5 percent over the year to June 2006. Back then the problem was under-utilisation or over-capacity with printers reporting that they were running at only 70 percent of full capacity. Moreover, the latest figures, rather than signifying a major expansion of the industry, merely take us back to where we were in 2004, the industry having experienced a couple of major slumps in between. Over this period, a lot of businesses have exited the industry so we now have a situation in which the industry is producing pretty much what it was doing three years ago but with considerably fewer players. That's consolidation; the question is to what extent it has actually improved the health of the industry by removing excess capacity.

Conventional wisdom has it that activity in the printing industry is strongly influenced by overall economic activity and, in particular, household expenditure; the more people buy, the greater the demand for printed products. Certainly, if one compares the changes in growth for the overall economy with growth for the printing industry, there is a general correlation but this is not a precise relationship. In fact, it seems increasingly tenuous; while overall economic growth figures dip and rise like a gentle swell rolling towards the shore, the printing industry is on a rollercoaster ride plunging up and down. No wonder so many printers feel slightly nauseous.

Such extreme swings back up the anecdotal evidence which sees printers remarking that business is 'patchy' or 'up and down'. Everybody expects seasonal changes but this is different, no longer appearing to follow a set monthly pattern. Like global warming and climate change, there is an uneasy feeling that the well-established seasonal rhythms of busy months and slow months throughout the year no longer hold sway. It's a funny old business, unsettling and confusing.

Bunking off PE?
To find out what somebody outside the business makes of it all, I spoke to Roy McKelvie, the amiable Scot who heads up Gresham Private Equity, the money people behind Geon. Certainly he doesn't believe in the latest growth figures, describing them succinctly as "bollocks". He points out that while there may be individual businesses that are doing very well, industrialised economies have generally been growing at about three to four percent over recent years so to achieve double that rate would be remarkable indeed.

This would seem to confirm the view that the industry is simply making up for lost time and it will be the next two or three quarterly figures that will reveal the true picture, whether or not the industry really is expanding or merely the victim of another 18 month cycle of boom and bust.

As for the upheavals in the financial markets in recent months which some commentators have warned could see the private equity market collapse, McKelvie commented that he doesn't expect it to have much impact over here although he added that it might have made a difference if it had happened last year. Certainly, the local PE market is not as big or as extensive as in the US where the fallout seems correspondingly more severe but this does seem to confirm the view that the PE industry peaked in 2006 and that this year will see some lessening of activity.

Indeed, 2006 saw a massive surge in private equity financing with leveraged buyouts (of which private equity buyouts are a part) totalling $US800 billion worldwide. That was more than double the previous year and six times higher than in 2000. The private equity industry itself raised about $US450 billion in 2006 and, before 'subprime' became a household word, was expected to easily exceed this amount in 2007. Now, in its latest half-yearly report released in September, the IMF predicts that losses from the US subprime mortgage crisis will reach $US200 billion and that leveraged loans to the value $US300 billion that were planned for the reminder of 2007 are now unlikely to proceed. That's a lot of money no longer available to invest in businesses, and already there have been reports of planned deals in the US involving private equity players no longer going ahead because of the changed conditions.

All this needs to be seen in perspective though. Most of this impact has been felt in the US, home of the exotically financed leveraged buy-out, but even there, although the numbers seem huge and the deals have been getting bigger, the private equity industry still accounts for just a tiny fraction of the overall debt market. It's something that started small, got bigger and is now shrinking back again, all the time remaining comparatively tiny in the global scheme of things. And if that's true of the US, it's even more so over on this side of the globe.

Do you know where you're going to?
Locally, private equity activity has lagged behind the US and been much smaller in size and scale. At the end of June 2006, total private equity funds under management in Australia totalled around $22 billion with average annual raisings of about $2 billion - peanuts compared to the estimated $1 trillion held in superannuation assets.

A Senate inquiry report into private equity finance released in August at the height of the subprime fallout listed a number of reasons why PE activity in Australia is expected to slow down in the coming months. These include a "re-evaluation of risk" in the wake of the subprime difficulties as well as a shrinking pool of viable takeover targets. In which case it's almost as if the party is over before it ever really got going. So where to now?

Roy McKelvie suggested that, up until now, printers have had unrealistic expectations of what they can expect to get for their businesses and that, in future, Gresham/Geon will be looking for exceptional propositions, businesses that offer something special in terms of value or strategic fit. There comes a point, he suggested, when it's more viable to rent extra space and put it more presses than to pay over the odds for a going concern.

It's a significant admission given that the accepted view has been that the PE players, having entered the industry, would look for the quickest exit with a nice profit, thank you very much, Certainly one of the features of the PE boom in recent years has been the faster than usual turnover of investments, on one estimate as short as 20 months after acquisition compared to the usual four to eight years. The question now is whether the 'global credit crunch' really will change the rules of the game and force the PE players to reconsider how, in the end, they intend to make any money out of printing. And if the industry follows its usual boom-bust pattern of recent years, then the next 12 to 18 months could will prove to be crucial in determining who gets out with their money intact.

Mind you, on the same day that Roy McKelvie talked about looking more circumspectly at any further deals, Geon was announcing the latest instalment in its buying spree with the purchase of Advance Press in WA. So while the flood of money may have reached it's high water mark, it doesn't appear as if the taps are going to turned off any time soon.