Donnelley Acquires Genesis - Analyst Blog

Printing major R.R. Donnelley & Sons Company (RRD) recently announced that it has acquired Lemont, Illinois-based privately held Genesis Packaging & Design Inc, for an undisclosed amount.

Genesis provides custom packaging, including designing, printing, die cutting, finishing and assembling services. Genesis also offers a broad spectrum of value added services, including design and production of point-of-purchase displays and signage.

Genesis boasts a clientele catering to sectors such as packaged food and beverage producers, pharmaceutical companies, consumer electronics manufacturers, retailers, consumer packaged goods producers and educational publishers.

Donnelley believes that the addition of Genesis’s technology to its group of solutions will expand its capability to serve its customers. We believe that the acquisition will also enable Donnelley to expand into new verticals and help it gain significant market share going forward.

Donnelley’s growth has been primarily driven by significant acquisitions over the last few years. In August 2011, Donnelley acquired LibreDigital, a digital content distribution provider, for an undisclosed amount. Further, the company also acquired New York-based privately held software company Sequence Personal, for an undisclosed amount.

From March 2008 to June 2011, the company acquired 6 companies, including 3 in 2010 and 2 in 2009. In the first half of 2011, Donnelley acquired 2 companies: Helium, Inc. and Journalism Online, LLC.

Although the company acquired 3 companies in 2010, the most significant was Bowne & Co, a provider of digital one-to-one printing services for health care, transactional communications, financial services, marketing communications and other applications. The Bowne acquisition proved accretive to Donnelley in the very first year. Bowne contributed 0.6% ($61.2 million) to the total revenue growth of $161.5 million in fiscal 2010.

We believe Donnelley is focusing on acquisitions to expand and enhance its offerings to its current customers, as well as to woo new ones. The company’s continued focus on acquisitions will also spur its already dominant market position and drive long-term growth, in our view.

Recommendation

We remain Neutral on a long term basis (3-6 months). Donnelley is witnessing stabilization in demand, increase in volumes and new customer wins. We believe that strong alliances and customer wins including those of AT&T Inc. (T) and Verizon Communications Inc. (VZ) will create value for the company over the long term.

However, we prefer to remain on the sidelines due to weak macro economic conditions prevailing in most of Donnelley’s current and prospective markets. Moreover, higher pension expenses, continuing pricing pressure, volatility in raw material prices and a highly leveraged balance sheet are significant headwinds going forward.

Currently, R.R. Donnelley has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).

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