If a week is a long time in politics, a day is a long time in business, and last Thursday must have felt like an eternity for Wes Lucas, now the former CEO of Quebecor World Inc (IQW). Thursday was the day that Quebecor’s shareholders reacted to the news that RSDB had rejected the $340m bid for its European division by sending IQW’s shares plunging to a record low of $1.18.
But how real now is the threat of bankruptcy for the printing giant that once dominated the North American market? I’m sad to say it looks a distinct possibility. IQW’s balance sheet is terrifying. Following the fall in its shares its market capitalisation stood at less than $130m. In January it was valued at almost $2bn; in January 2003 double that.
Over the past 12 months the company’s debts have risen from $1.9bn to $2.24bn, or, and even more importantly, from about 1.1 to almost 20 times its total market capitalisation. In addition to its long-term debt, the company has around $1.8bn of other liabilities meaning that it now faces financial liabilities to the tune of $5bn.
It gets worse. The credit rating agency Standard & Poor this week downgraded the rating of the company’s long-term corporate debt to CCC, from B–. At the same time it downgraded the rating of its revolving credit facility, which currently stands at around $740m to CCC citing the belief that this will soon need to be extended. Moody’s soon followed suit.
With the credit crunch in its infancy and uncertainty paralysing the money markets (where debt is collateralised and sold off enabling companies to refinance or increase their debt levels), Quebecor’s CCC rating has essentially rendered it a financial leper as their unsuccessful attempt to refinance at B- in November proved.
Further misery faces the company as Quebecor is tipped by analysts to breach its debt covenant with its Q4 07 or Q1 08 results. Debt covenants are contractual terms in a loan that can mean it is in default even if you haven't missed a payment; ie the lender will stipulate that if the balance of debt exceeds x times EBITDA then you have to repay the loan. Unless it can earn a reprieve it could find itself in very hot water.
Is there any good news? Perhaps: IQW is asset rich. The company has over $5.5bn of assets on its balance sheet, predominantly made up of physical assets such as property and equipment ($2.1bn) and goodwill ($2.2bn). This sounds like a safety net but every silver lining has a cloud and if there is one thing that the RSDB veto has taught us, it is that assets in a distressed business are not worth their face value.
John Caris, CEO of RSDB, insisted that the $341m price tag it had agreed on Quebecor’s European division was “a fair asset value” which, in view of IQW’s recent retooling programme, seems reasonable in terms of the value of its physical assets. However the shareholders did not believe it to be a fair real value in light of the business’ balance sheet.
Following the company’s recent turmoil, the value of its goodwill, notoriously difficult to price at the best of times, will have dropped substantially. In addition the possibility of a fire sale, perhaps forced by any potential breach of covenant, will see the physical assets sold at well below their face value, so the total assets the company owns is way below the $5bn mark and therefore, way below the current value of their liabilities.
Salvation at this point therefore can only come via a bid for the company. Rumours are that private equity players KKR and Cerberus are among the vultures circling Quebecor World. The chances are that these guys will buy the operations whole, patch them up and sell them on, either as one group or, more likely, following a break-up.
Cerberus has recently demonstrated a penchant towards distressed companies (the bid for Northern Rock being one example) and my money is on them, especially if they lose out on Northern Rock. RR Donnelly and Transcontinental are also touted as trade buyers, although it is highly unlikely that they will want to acquire IQW in its entirety, perhaps sharing the meat between them and leaving the carcass to rot.
However, if a bid fails, whether through Quebecor’s shareholders refusing to accept a nominal fee or no buyer coming forward, it is hard to see any circumstances in which the company could avoid bankruptcy. In a more favourable credit climate perhaps they would be able to refinance and reduce payments until they had got their house in order but, with the credit crunch in full swing, it looks like being a very bleak winter indeed for IQW.