Right sizing the printing industry: magazine article
In recent months I've had a round of meetings with some of the new players in the industry, the merchant bankers and new managers of the multi-million dollar printing companies formed through consolidation.
These are blokes who invest and control buckets of money and whose decisions are having a major impact on the printing industry in the region. As far as I can gather, the newly created GEON, after its Promentum takeover, is, with a AUD$380 million turnover, the largest dedicated commercial sheetfed printing company in the world. That's a brave leap in anyone's terms.
If you and I were going to invest that kind of money we would do some serious research, and while I'm not suggesting these funds walked into the industry without due diligence, there was one serious blind spot; none of them I spoke with had heard about Polestar.
Polestar is the largest independent European printing company, with sites in the UK, Spain and Hungary. The creation in 1998 of its major shareholder, Bahrain-based private equity fund, Investcorp, it grew from the AUD$1.9 billion buy-out of two printing companies, the British Printing Company, a relic of Robert Maxwell's shonky empire, and publicly-listed UK Printer, Watmoughs. In the eight years of its life, it has never made a profit, despite turning over $921 million in 2006. Last year it posted a loss of $303 million and the year before, $293 million. In December, to avoid bankruptcy, it went into financial restructuring that resulted in staggering losses for its equity and debt investors.
Over the years Investcorp pumped huge amounts of money into the company, which specialises in gravure and web offset printing. In 2005 it tipped in $179 million to help with the creation of a new greenfield site in Sheffield equipped with the latest Cerutti presses. But it was all to no avail. In the wash-up, Investcorp had to cede control of the company to its bankers and take a loss of its entire investment, thought to be in the region of $607 million. The bankers have had to write down two-thirds of their investment, another $607 million, while other investors have been wiped out to the tune of $440 million. All told, a loss of $1.7 billion in a printing company.
Chief executive of Polestar, Barry Hibbert, is still in place, as is his senior management team and now that the balance sheet is a lot cleaner, the future is looking brighter for the troubled group that employs 4,700 across its sites.
So what's the point? It's not so much that the new boys on the block did not know about the largest private equity disaster in the printing industry before they invested their money - although they should have. It is that there may be reasons why printing companies usually do not grow into huge multi-million dollar enterprises. There may be an optimum size for a printing company, which could explain why the industry is so fragmented, populated with lots of companies with less than 20 workers.
The rationale behind consolidating printing companies into huge enterprises is that it allows benefits of scale to be applied to purchases and manufacturing discipline to production. And there's a lot of truth in there. But there are also some limitations. Printing jobs can be tricky and varied; requirements for paper can be all over the shop with clients wanting specialities that are not always available from the preferred supplier. As for the notion that printing is merely changing the pattern on the substrate, a task that be safely be left to manufacturing automation, I'd hate to pick up the bill for the jobs that required a skilled tradesman but didn't get one.
Yes, the industry is changing and perhaps bigger will prove to be better. But there are a heap of printers out there of varying sizes, even some with an old AB Dick in the garage who print the local sports clubs' menus and the town's fliers. If there is no work this week they are not too worried; the kit doesn't owe them any money and besides, the surf is up or there's a round of golf to play. You cannot compete with these guys and you wouldn't want to anyway.
They may not pose a threat to the large ongoing contracts that are the lifeblood of the printing groups, but they and the many small- to medium-sized firms will always be players in the 60 percent of commercial printing that is job specific. They will put in a quote and the sales people of the largest printer will have to match them or lose out. It may not be efficient but it is part of the reason why the printing industry is so fragmented - which ironically is what attracts private equity in the first place.
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