US gov’t attempts to block Quad/LSC merger

By Richard Stuart-Turner, Friday 21 June 2019

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US group Quad/Graphics said it intends to “vigorously defend” its proposed acquisition of rival LSC Communications, in response to a lawsuit from the US Department of Justice (DOJ) which is seeking to block the deal.

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Quad/Graphics is intending to work together with LSC to contest the DOJ’s allegations

Announced last October, the all-shares $1.4bn (£1.1bn) deal – which would create a new $8bn turnover industry giant – was approved by shareholders of both companies in February this year.

According to Reuters, The DOJ said the two firms were each other’s biggest rivals, citing internal documents that referred to a price war and a “two-horse race between LSC and Quad”.

Makan Delrahim, an assistant attorney general in the Antitrust Division, said: “American publishers and retailers rely on Quad and LSC to print and distribute billions of magazines, catalogues and books each year.

“If this deal were allowed to proceed, Quad would dominate the markets for magazine, catalogue and book printing services and be able to raise prices.”

In its complaint, filed in federal court in Illinois, the DOJ said Quad and LSC (formerly the RR Donnelley magazine, catalogue and book printing operations) were “the only realistic option for many publishers because of their complex printing equipment”.

Quad said it is intending to work together with LSC to contest the DOJ’s allegations.

“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees,” said Quad chairman, president and chief executive Joel Quadracci.

“We also believe that the business combination will create a highly efficient print manufacturing and distribution platform that will strengthen the role of print in an increasingly multichannel media world that is dominated by digital advertising.

“We are fully committed to defending the DOJ’s lawsuit in court. We believe the combination of Quad and LSC is the best outcome for all stakeholders and that the DOJ’s attempt to stop the transaction will unfavourably impact our clients, our employees, and the print industry.”

He added: “The DOJ’s position ignores the dynamic conditions in the US commercial printing industry, which consists of nearly 50,000 companies, generates an estimated $76bn in aggregate annual revenues and provides ample competition for the supply of printed products, especially in the face of decreasing demand.

“Neither Quad nor LSC accounts for more than 5% of that total print industry revenue. By comparison, two digital media companies, Google and Facebook alone, have worldwide digital ad sale revenues totalling more than $75bn – nearly the same amount as the entire printing industry.

“This underscores a key point: our competition is not only other printers, but also other forms of media. Quad is in the business of manufacturing advertising and, therefore, is a direct competitor to digital channels.

“Given the continued migration of advertising dollars to digital channels, the printing industry has pursued platform consolidations as a key way to eliminate inefficient and expensive overcapacity, streamline operations and create the efficiencies.

“This will help ensure print remains an economically feasible alternative to digital channels for publishers and retailers. Our goal is to make print a more effective and affordable media option to that of digital giants such as Google and Facebook. The DOJ does not appear to recognise the competitive effect of digital media on the print industry.”

He said that regardless of the outcome of the DOJ’s challenge to the transaction, Quad “will continue to take a disciplined build-partner-acquire approach to solve more of our clients’ most complex marketing problems and process challenges”.

The company said that while it is unable to predict the timeframe for completion of the litigation, either Quad or LSC can terminate the merger agreement if the transaction is not consummated by 30 October 2019, or if there is a final, non-appealable order preventing the transaction.

In this case, Quad will be required to pay LSC a “regulatory approval reverse termination fee” of $45m.

Quad has two printing plants in Poland encompassing web offset, large-format, and commercial printing. Neither Quad nor LSC currently have any operations in the UK. Both firms employ around 22,000 staff each.

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