ARC is the only publicly-traded
“reprographics” company, but, from time to time, I do look at publicly-traded
“printing” companies, just to see how the “printing” industry is fairing (at
least from the perspective of publicly-traded printing companies.)
It is not uncommon for companies to buy
(acquire) businesses that aren’t directly related to their traditionally
operated (i.e., “core”) businesses. This
sometimes happens because the growth outlook for a company’s core business
isn’t deemed to be fantastic, this sometimes happens because the business to be
acquired “appears to provide” some sort of synergy with the company’s core
business, and, yes, this sometimes happens simply because management gets bored
with its core business. Whatever the
case, the term, “diversification” is the one used to describe a company’s move
(i.e., expansion) into a non-core business.
And, sometimes this works, but sometimes it does not.
The company featured in this blog post is
Ennis, Inc., an NYSE-traded company.
Being an older person, I well-remember Ennis
from its days as one of the country’s premier business forms
manufacturers. In fact, years ago, I was
an Ennis customer (bought multi-part invoices and statements to run through our
computer printers) and an Ennis re-seller (occasionally took orders for
business forms, which we subbed out to Ennis.)
In 2004, Ennis ventured into the apparel
business, buying Alstyle Apparel for $242 million. In 2016, Ennis exited the apparel business,
selling Alstyle for $110 million. From
an accounting perspective, no, Ennis did not report a $132 million loss on the
sale of Alstyle. Its loss was much
lower, due to the fact that, during the 12 years Ennis owned Alstyle, it took
deductions for depreciation and amortization.
Apparently, the acquired “apparel” business
fit (pun intended) for approximately 12 years.
Subsequent to the sale of Alstyle Apparel,
Ennis is in much better shape financially.
Kudo’s to Ennis’ management team for making the right decision….finally.
One point I’d like to make to reprographers,
to those who are exploring ideas to diversify their businesses. (And, many are, simply because traditional
reprographics is in a declining trend.)
Be very careful about buying into industries you know little about. Just because something “sounds cool”, doesn’t
mean it will be profitable….. or worth the time spent or money invested.)
BACKGROUND INFORMATION – ENNIS IN,
ENNIS OUT….
June 2004 – Ennis buys Alstyle Apparel
Ennis, Inc.,
the Midlothian, Texas-based business forms company (NYSE: EBF) reported that it will buy
privately held Alstyle Apparel for $242 million in stock and debt. Ennis plans
to issue 8.6 million to 8.9 million shares for the deal with an estimated
per-share price of about $15.60, according to the company. The deal also
involves taking on about $104 million to $108 million in Alstyle debt.
May
2016 – Ennis sells Alstyle Apparel
Midlothian, TX, May 4, 2016 — Ennis, Inc. (the “Company”), (NYSE: EBF), today
announced that it has accepted a superior offer to sell Alstyle Apparel, LLC
and its subsidiaries, which constitute the Company’s apparel division (the
“Apparel Division”), to Gildan Activewear Inc. (“Gildan”) and that it has
terminated its previously announced sale agreement with another buyer, all as
more fully described below. Sale of
Apparel Division:
In connection with the superior offer, the Company and Gildan have entered
into a Unit Purchase Agreement, dated May 4, 2016 (the “Gildan Purchase
Agreement”), pursuant to which Gildan will acquire the Apparel Division from
the Company for an all-cash purchase price of $110,000,000, subject to a
working capital adjustment, customary indemnification arrangements and the
other terms of such agreement (the “Gildan Transaction”). The closing of the
Gildan Transaction, which is anticipated to occur by the end of the Company’s
second fiscal quarter, is conditioned upon customary closing conditions,
including applicable regulatory approvals. Following the closing, the Company
will provide transition assistance to Gildan for certain administrative,
financial, human resource and information technology matters and will sublease
from Gildan a portion of a certain property located in Anaheim, California that
is leased by the Apparel Division. As part of the purchase price, Gildan has
funded the Company’s payment of the $3,000,000 termination fee payable to the
initial buyer of the Alstyle Division in connection with the termination of the
initial purchase agreement with such buyer, as more fully described below. Prior
to the Gildan Purchase Agreement, on April 1, 2016, the Company had entered
into a Unit Purchase Agreement (the “Initial Purchase Agreement”) with Alstyle
Operations, LLC (the “Initial Buyer”) and, for the limited purpose set forth in
such agreement, Steve S. Hong. Under the Initial Purchase Agreement, the
Initial Buyer had agreed to acquire the Apparel Division from the Company for
an aggregate purchase price of $88,000,000, consisting of $76,000,000 in cash
to be paid at closing, subject to a working capital adjustment, and an
additional $12,000,000 to be paid pursuant to a capital lease covering certain
equipment utilized by the Apparel Division that was to have been retained by
the Company. The Initial Purchase Agreement also contemplated post-closing
transition services and a sublease similar to those contemplated by the Gildan
Purchase Agreement. Under the Initial Purchase Agreement, the Company had
retained the right to terminate such agreement in the event that the Company
were to receive an unsolicited purchase offer for the Apparel Division which
was not matched by the Initial Buyer that, in the judgment of the Board of
Directors of the Company in the exercise of its fiduciary duties on behalf of
the Company’s stockholders, constituted a superior offer to the transactions
contemplated by the Initial Purchase Agreement. Pursuant to its retained
termination right and after the expiration of the time period during which the
Initial Buyer was permitted to deliver a matching proposal, on May 4, 2016 and
prior to entering into the Gildan Purchase Agreement, the Company terminated
the Initial Purchase Agreement and paid the required $3,000,000 termination fee
to the Initial Buyer in connection therewith.
Keith Walters, the Company’s President, Chief Executive Officer and
Chairman of the Board, commented by stating, “given the higher purchase price
offered by Gildan and the fact that the entire purchase price is payable in
cash at the closing of the Gildan Transaction, we believe that the sale of the
Apparel Division to Gildan represents a superior offer for the Company and our
stockholders. As previously noted, given our strategic direction to focus on
the further expansion of our Print Segment, the Apparel Segment was deemed to
be a non-core asset. The sale of this non-core asset allows us to fully focus
on our core business segment and to be able to utilize the cash from the sale
of Alstyle Apparel to further expand this business segment through strategic
acquisitions, through which we have been able to continually demonstrate
excellent returns to our stockholders. In addition, given our current leverage
position, the Board may also consider other uses of these funds such as, paying
down debt, additional share repurchases of our Company stock, and the return of
capital to our stockholders in the form of a one-time special dividend. We are
extremely excited about what the sale of this non-core asset means to the
Company. It will not only further strengthen one of the strongest balance
sheets in the industry, but will allow us to proceed aggressively with our
strategic direction for the Company.”
Also
mentioned in May 2016 – Loss to be reported on Sale of Alstyle:
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The Company previously announced its financial results for the quarter
and fiscal year ended February 29, 2016 in the Company’s Form 10-K filed on May
11, 2016. Based on presently available
information, on a preliminary and unaudited basis, the Company anticipates that
it will incur a pre-tax loss on the sale of the Apparel Division to Gildan of
between $25 million and $35 million. Based on certain tax elections
expected to be made, the Company is expecting to be able to treat the loss as
an operating loss for tax purposes.
Reprographics 101 