The announcement that PMP is to acquire IPMG is potentially the largest change to the local print market since PMP itself was created out of the need for Rupert Murdoch to rationalize his printing business interests in the early 1990s. But what is the catalyst for this deal and how does PMP effectively ‘buy’ IPMG, but leave the Hannan family as its largest shareholder? Industry analyst, Glenn O'Connor, explains the deal.
PMP and IPMG have both struggled to compete with the flow of advertising revenue to digital and online outlets. The number of magazine pages printed on large heatset web offset presses has fallen off a cliff, resulting in production holes which can really only be filled by lower margin catalogue work. This brings only small improvement to the returns of these businesses as it is largely finished on press, effectively reducing the opportunities to add value through bindery or other offline processes. Add to this the demise of Dick Smith and Masters (both PMP clients), reduced catalogue regularity by a couple of large retailers. In addition Fairfax has expanded its heatset and UV commercial printing capabilities – and it’s obvious genuinely profitable opportunities in this market have contracted.
By combining forces, this new ‘improved’ PMP will be able to rationalize press investments, consolidating underutilized and aged machinery to streamline its production to ensure best performance as a business.
It’s pertinent to note that this is a cashless deal. The Hannans are effectively handing over the entire IPMG fleet of presses and communication companies in return for 37% of the new entity, valued at somewhere around $120m on the day the deal was announced –around six times net adjusted profits.
The key benefit for the Hannans is that their shareholding is reasonably liquid. Exiting IPMG under any other arrangement would require a trade sale, or an IPO, both long winded, costly and invasive exercises for a company that has always appreciated discretion around it’s financial performance. In some ways, it is almost a reverse takeover. The Hannans have found themselves in the enviable position where they have gained two seats on the board, and a relatively liquid investment as the major shareholders. They’re locked in for at least two years but then they can divest over time to use the capital in other business pursuits. Conversely and more importantly they can position themselves as benevolent shareholders over the longer term by incrementally increasing their shareholdings over time. All in all not a bad deal to potentially control just over 50% of a business with forecast revenues of over $1.2b, and tipped to generate a lot of free cash per year once consolidations are completed in 2018.
What does this mean for existing PMP shareholders? Peter George has dealt with years with no dividend and high levels of debt admirably. Considered a tough operator, he has earned respect by absolute discipline to deliver upon a strategy to correct both of these things. He has obviously also gained the respect of his biggest competitor. Let’s be honest, if the Hannans had no faith in him, there is little chance that they’d place $120m worth of investment in a company he’s managing. A 30+% jump in the share price in the week the deal was announced is a sign of the market’s confidence in this deal.
As this article is being written, the ACCC announced it would look into the deal. However, PMP/IPMG could easily argue that their competition is not limited to the print market. Digital advertising is a much bigger threat than a competitor buying a 64pp-heatset web press to plonk on a greenfield site in Western Sydney. Following on, the shareholders get to vote at an Extraordinary General Meeting in mid December. I’ll be surprised if a clear majority didn’t endorse it, and the transaction is tabled to be completed by early January.
If that goes to plan expect a lot of change to occur in 2017.
The fallout
From a competition viewpoint, the single biggest impact from this deal appears to be on Salmat. By leveraging the IPMG print offerings a revived PMP Distribution will now be able to bundle almost any format or size that might be required for print and distribution. Salmat is a business that is already under pressure to perform after a rough couple of years with significant losses, and has just announced that it is looking for sales growth as its key focus in the coming years. No doubt a combined PMP/IPMG will put enormous pressure on that strategy in the letterbox distribution business.
Following on, next in line in the most affected column are AIW Printing and Franklin Web. It's no secret in the heatset web offset world that AIW is considered to be underperforming and analysts reckoned on either PMP or IPMG as a likely white knight, but (to mix a metaphor) that ship may well have sailed.
Franklin Web has outperformed both IPMG and PMP for many years, although they’d argue against it. Phil Taylor’s exit plan might need some finessing now that a trade sale is probably only likely if Bluestar Print’s parent, IVE Group, came knocking. If IVE makes an opportunistic play for AIW in wake of the PMP/IPMG merger then this will make it even harder for Franklin to compete on national retail contracts, with its heatset production facilities limited only to Victoria.
On the client side, clearly the major magazine publishers –Bauer, Pacific Magazines, News Corp – will possibly be voicing their concerns to the ACCC on this deal, (this now appears unlikely: see comments, ed.) alongside the major catalogue users Woolworths, Coles, Aldi, et al, who will all see this as a restriction on competition, and an almost monopolistic supply chain for nationally produced print. These publishers and retailers should recognize some of the blame for this rationalisation lies with them. By devaluing print, and driving the price downwards they have created a pricing spiral that is obviously unsustainable in the medium term, and has destroyed tens of millions of dollars in value, and thousands of jobs.
And the employees? Sadly a significant number of them will face sleepless nights in the coming months. There is a lot of crossover in the production and account management teams in Sydney and Melbourne, and once the rationalization of the heatset plants is sorted, there will be a lot of redundancies and retirements forced by closures.
In addition, there are paper agents, ink suppliers, machinery companies and others who have relationships with both companies. These will all be whittled down to single points of contact, and most likely a single national purchasing contract for all items related to production requirements. This is a much bigger deal than it seems when you are reducing the market by a single participant. The implications of this could affect the wider print market in years to come.
There are a number of areas where this merger will be complimentary, particularly in the sales area. PMP lacks print sales grunt in the commercial print market, where IPMG is quite strong. The combined digital/preproduction businesses will have a footprint to rival Wellcom across Australia and New Zealand.
PMP divested its Australian sheetfed business to Penfold Buscombe (later GEON) in 2004, so the addition of the Offset Alpine and Inprint fleet will provide the opportunity to add value to some of the magazine titles they currently outsource for sheetfed printing. PMP’s recent digital investment in the book market, and consolidation in magazine distribution services (Gordon And Gotch) puts them in a very strong position – not necessarily for growth, but for profitability.
The existing PMP businesses in New Zealand are steady performers, and could further capitalise on their position as the biggest print group in the Shaky Isles.