Baltimore's Vertis Communications announced yesterday that it will acquire one of its largest competitors in a combination of two debt-laden firms struggling to make money in a rapidly changing printing and advertising industry.
The value of the deal with privately held American Color Graphics was not immediately clear. American Color Graphics' owners will receive 10 percent of the combined company's equity and 8 percent of mezzanine subordinated notes of Vertis Holdings, the parent company of Vertis. Vertis is owned by an investor group led by Thomas H. Lee Co. and Evercore Partners.
Vertis is one of the largest providers of advertising products and services, including coupons, television guides and Sunday comics inserted into newspapers. It also provides other services such as consumer research and direct mail.
With 5,800 employees, including 150 in Maryland, Vertis has 38 production facilities across the country.
American Color Graphics provides similar products and pre-media services, such as page layout and design and content management. It has 2,060 employees, with eight printing facilities in Canada and the U.S., mostly on the East Coast, including one in Belcamp. The company, headquartered in Brentwood, Tenn., also has six service centers.
"The two are geographically complementary and the customer base is complementary," said Mary Ross Gilbert, managing director and director of fixed income research at Imperial Capital, a brokerage and investment bank in Los Angeles.
"Vertis is strong in the West, and ACG is strong in the East," Gilbert said.
American Color Graphics' clients include home improvement and specialty retailers, while Vertis is strong in the financial and grocery segments, Gilbert said.
Vertis chief executive Michael DuBose, a turnaround artist hired in December, will head the combined company. ACG chief executive Stephen M. Dyott is expected to remain to help with the transition and integration. Vertis' headquarters will remain in Baltimore.
DuBose said the merger will help the combined company to better compete in a tough industry.
"It's an opportunity for us to be able to take the best of Vertis and best of ACG and combine into a stronger business," he said.
Vertis and others are trying to adjust to an environment where traditional print advertising has become less effective. Newspaper circulation has been eroding in recent years with the news audience increasingly turning to the Internet and other forms of media. Advertisers, too, are shifting their spending to alternative channels.
With demand dwindling and competition increasing, Vertis and its competitors have struggled to deal with excess capacity in printing services industrywide. As a result, lower prices and volume have cut into profits.
Vertis, still heavily in debt from a leveraged buyout in 1999, reported a net loss of $26.2 million on revenue of $1.47 billion last year. For the year ending March 31, American Color Graphics reported a net loss of $21 million on revenue of $445 million. ACG is also in debt from a leveraged buyout.
DuBose said the merger will increase operational and cost efficiencies and improve customer service. When asked about possible plant closures, combining operations or layoffs, DuBose said it's too early to "quantify or qualify those."
Gilbert, the analyst, said the combined company will likely create savings by reducing corporate overhead and purchasing costs, and shutting down the least efficient printing operations.
The two companies said they expect to sign a definitive merger agreement by Aug. 13. The merger is subject to the amendment, refinancing or repayment of the two companies' debt and the successful exchange of their outstanding notes.