This year is shaping up to be a sparkling one for our Contra the Heard portfolio, and a strong contributor has been a string of takeovers. First, Corel was bought out by Vector, then Boise Cascade lunged at Office Max, and Air France is in the process of flying off with KLM.
Now R.R. Donnelley is bidding for Moore Wallace. Four takeovers in such a short time frame is remarkable, though we managed equal tallies in 2001 and 1997; 1999 remains our record high, with five.
This year is a big surprise, given our view has evolved on the "devil of over-diversification." The portfolio used to often sport more than 30 stocks, but we reckoned that a team of 15 to 25 would be easier to handle and produce better results. Currently there are 19 in the lineup, leaving plenty of room for December draft picks.
We first wrote about form and printer giant Moore in our inaugural Globe column, almost four years ago, when its stock traded at about $8. A lot has happened since then, and the return to favour of this downtrodden corporation has been anything but a straight line.
Spinning its wheels in an endless loop of restructuring, the enterprise finally began to right itself under the stewardship of Robert Burton. Besides being an efficient manager, Mr. Burton also brought the former Canadian blue chip into the orbit of American financial interests. Some of these funds ultimately helped Moore pull off a takeover of rival printer Wallace.
All this won the attention of R.R. Donnelley, a huge publishing outfit with sales of about $4.75-billion (U.S.). Donnelley prints everything from TV Guide and Sports Illustrated to catalogues and bestsellers. Its direct-mail division makes entire forests quake in fear. You might not think the junk-mail business is hurting, yet the stock price has been depressed and is finally in recovery mode, well below where it spent most of the past eight years.
The merger will create North America's largest printer, dethroning Quebecor. The prospects of this new conglomerate, which will be run by Mr. Burton's relatively recent replacement, Mark Angelson, look promising. People on the Donnelley side suggest the merger will be immediately accretive to profit after transaction costs.
They estimate annual savings at about $100-million in the first 12 to 24 months. Advertising is highly sensitive to the economy, so a sustained recovery is apt to drive profits from commercial printing sharply higher. This should help to cover the juicy dividend, currently $1.04 a share.
Making big deals is one thing, running a complex amalgam of three corporate cultures is another. Our original sell target of $27.75 (Canadian) for Moore translates to $33.63 (U.S.) for Donnelley, though after all these twists and turns, this must be recalibrated. We hold for now, believing on initial blush that this complementary merger will likely lead to a higher valuation for the combined entity.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.