RR Donnelley’s Bold Growth Plan
RR Donnelley’s management has decided to split the company into 3 smaller businesses by the end of 2016 (pending regulatory approval which should not impede progress) via a tax free spin-off. The company will pay its current dividend until the spin-off is complete. Capital allocation (in particular, dividends) policy will be updated in each of the 3 businesses after the spin-off is complete. The 3 businesses post-spin off will be:
– Customized Multi-Channel Communications Management (abbreviated as CMCo)
– Publishing & Retail-Centric Print Services (abbreviated as PRSCo)
– Financial Communications Services (abbreviated as FinancialCo)
The image below shows the expected revenue growth rate and total expected revenues of each of the 3 companies:
Source: RR Donnelley Best Ideas Conference Presentation, slide 14
The spin-offs will create 2 businesses with relatively slow revenue growth, and one business (PRSCo) with negative revenue growth. This will give current investors in RR Donnelley the chance to benefit from the company’s positive growth operations without investing in the declining publishing and retail print business.
This solves the ‘negative growth problem’ that is holding down RR Donnelley’s share price. While vague, it appears that the slowly declining print business will be saddled with much of the company’s debt based on the quote below from the ‘Best Ideas Conference Presentation’:
“It is expected that the currently outstanding RRD notes will remain at CMCo and that CMCo will receive certain cash proceeds in connection with the capitalization of each of PRSCo and FinancialCo”
Overview of RR Donnelley Post Spin-Off
A brief description of each of the ‘new’ post spin-off companies is below.
CMCo will provide retail/brand execution of labels, point-of-purchase displays, packaging, print, and digital marketing. In addition, CMCo will offer its customers logistics services and value-added services including project marketing, project management, and communication.
FinancialCo will provide financial management services to businesses. Services offered include IPO documents, proxies, shareholder report solutions, delivery of investor communications, regulatory filings, report management solutions, and data analytics.
PRSCo will provide traditional publishing and retail print services. Key print products are: books, magazines, directories, retail inserts, catalogs, and office products.
Spin-Offs Unlock Value
The break-up of RR Donnelley will unlock value for shareholders. The company has traded for a price-to-earnings ratio under 11 for much of the last 5 years. RR Donnelley’s forward price-to-earnings ratio is currently just 10.3.
With two of the 3 spin-off companies expecting positive revenue growth, the split-up value of RR Donnelley’s assets is greater than its current value.
I believe that both FinancialCo and CMCo will likely trade for price-to-earnings multiples of at least 15 if they maintain their revenue growth targets. Additional growth will come from a better focused management team.
PRSCo will likely maintain a low price-to-earnings ratio as its lack of growth and declining market does not bode well for shareholders. PRSCo’s management will hopefully manage the company as a cash-cow and return nearly all cash flows to shareholders in the form of dividends.
Final Thoughts
RR Donnelley’s break-up will very likely prove to be beneficial for shareholders. The company’s 6.0% current dividend yield is more-than-fair compensation while investors wait for the break-up to unlock value.
The company is not a traditional dividend growth stock. RR Donnelley’s poor growth over the last decade prevent it from ranking highly using The 8 Rules of Dividend Investing.
With that said, I believe RR Donnelley & Sons Co (NASDAQ:RRD) shareholders will see significant capital gains once the spin-offs complete near the end of 2016. Investors will also receive a 6% return from the company’s dividends while they wait. The lack of a consistent dividend policy (as of yet) post spin-off makes this stock a poor choice for strict dividend growth investors. RR Donnelley is a compelling purchase at current prices for value investors willing to hold through the spin-off.
Disclosure: None
