CHATHAM, N.J., Sept. 27, 2021 /PRNewswire/ -- Chatham Asset
Management, LLC ("Chatham"), a
private investment firm which manages funds that beneficially own
approximately 14.9% of the outstanding common stock and which is
the largest bondholder of R.R. Donnelley & Sons Company ("RRD"
or the "Company") (NYSE: RRD), today sent a letter to RRD's Board
of Directors (the "Board") following the Board's inaction and lack
of engagement with Chatham despite
the continued destruction of stockholder value at RRD.
Chatham believes that the
following initiatives must be implemented to stabilize RRD's share
price and drive future value creation:
- A clear strategic review process focused on the identification
and sale of non-core assets;
- Increased operational efficiency through improved margins from
cost reduction;
- Improved capital allocation; and
- Better alignment of executive compensation with
performance.
If the Board does not proactively respond to Chatham's suggestions, including by appointing
a new Chairman and adding new directors, terminating the Company's
poison pill, and forming a strategic review and finance committee,
Chatham will be left with no
choice but to commence a proxy contest.
The full text of the letter follows:
September 27, 2021
The Board of Directors
R.R. Donnelley & Sons Company
35 West Wacker Drive
Chicago, Illinois
60601
Dear Members of the Board:
As you are aware, Chatham Asset Management, LLC (together with
its affiliates, "we" or "Chatham")
is the largest stockholder and bondholder of R.R. Donnelley &
Sons Company ("RRD" or the "Company"), beneficially owning
approximately 14.9% of the Company's outstanding common stock and
40.9% of the Company's outstanding bonds. We are disappointed that
we find ourselves issuing another public letter to you, despite our
significant recent efforts to work together to unlock value at RRD,
including through a refreshment of the Board of Directors (the
"Board").
Since our last public letter on September
1, 2021, we privately proposed that the Board be refreshed
with the addition of two new directors, as recommended by
Chatham, who have strategic,
capital allocation and governance expertise. We also proposed
that the Board appoint a new Chairman and that the existing
Chairman, John C. Pope, who
has been on the Board for 17 years and has overseen a decline in
RRD's stock price of over 91% in that time, retire by next
year's annual meeting. We further proposed that the Board
immediately terminate its poison pill and form a new strategic
review and finance committee at the Board level, to be chaired by
one of Chatham's designees,
focused on monetizing RRD's non-core assets, unlocking operational
efficiencies and improving RRD's capital allocation. Given
the precipitous decline in RRD's stock price since July 2021, we were shocked that even after two
weeks the Board neglected to give our proposal a substantive, or
indeed any, response. Even for a board that has repeatedly failed
to maximize stockholder value, its unwillingness to respond in a
timely fashion to our legitimate concerns and reasonable proposals
to address the Company's dismal performance, is inexcusable.
Despite our frustration with the Board's continued inaction, we
remain convinced that there is meaningful value to be unlocked at
RRD. We believe that through straightforward initiatives –
including: (i) a clear strategic review process focused on the
identification and sale of non-core assets and unencumbered real
estate, (ii) increased operational efficiency through improved
margins from cost reduction, (iii) improved capital allocation, and
(iv) better alignment of executive compensation with
performance – RRD's stock has the potential to increase to
more than $13 per share,
representing an increase of over $9
per share, or 210%, compared to RRD's share price as of market
close on September 24, 2021.
In our view, a change in Board leadership, the addition of new
directors, the immediate termination of the poison pill and the
formation of a strategic review and finance committee can help
unlock this value, and we urge the Board to constructively reengage
with us to avoid facing a proxy fight in the near term.
Free Fall Destruction of Share
Value
At the time of our public letter dated July 28, 2021, in which we urged the Board not to
renew the Company's poison pill, RRD had an equity cap of
$427 million. As of September 24, 2021, RRD's total equity cap was
$319 million. In the space of
58 days, during which period the Board renewed the Company's poison
pill over stockholder objections,
the Board has overseen the dramatic destruction of approximately
$108 million in stockholder value due
to a 25% decrease in share price. Over this same period,
the S&P 500 and Russell 2000 indices gained just over 1% each.
Further, Quad/Graphics, Inc. (NYSE: QUAD, "Quad"), one of RRD's
closest public comparable companies, has seen its share price
increase more than 19%1 over this same
period. Clearly, RRD is not simply a victim of market forces.
% Change, 7/28/21 –
9/24/21
|
|
RRD
|
-25.3%
|
QUAD
|
19.9%
|
S&P
500
|
1.2%
|
Russell
2000
|
1.0%
|
|
|
|
Fig. 1: Comparison of
percent changes over time
|
This recent precipitous decline is on top of a roughly 83%
decline in share price since the spin-off of Donnelley Financial
and LSC Communications in 2016, during which time the S&P 500
has gained 105%, and the Russell 2000 has gained
80%.2
RRD is in Gross Need of a Clear and
Decisive Strategic Vision
As a longstanding consolidator in the commercial print industry,
RRD has acquired a large portfolio of businesses. We believe such a
varied portfolio is no longer advantageous, however, given current
industry dynamics and the leverage under which the Company
operates. We also note that as of its most recent Annual Report,
RRD reported owning or leasing 199 facilities globally, of which
some 43% of the square footage was owned. The reported book value
of owned real property is roughly $400
million, or 1 full turn of leverage.3
Sale-leasebacks or outright sales could provide meaningful proceeds
to further deleverage the balance sheet, provide capital to return
to stockholders in a prudent fashion, and continue to invest in the
Company's growth. We urge the Board to form a new strategic review
and finance committee to work aggressively to refocus the Company
on its strategic business lines and explore ways to monetize RRD's
portfolio of non-core businesses and/or unencumbered real estate
assets.
As just one example, we believe that RRD's foreign operations
must be reassessed, specifically its China-based Asia Printing and Packaging
business. We believe if this segment were sold for the $800 million rumored last
December,4 proceeds from the divestiture of
this business could be applied to pay down RRD's outstanding debt
and could lead to a material price per share increase. Applying
proceeds from this sale to repaying a
portion of RRD's debt, even assuming that upwards of 40% of
the gross sale amount are used to pay related taxes and fees, could
lead to annual interest savings of over $25
million. These interest savings alone could easily
fund a reinstated annual dividend of $0.34 per share, which implies a price per share
of $13.60 at a dividend yield of
2.5%.5 Together with the other
operational improvements highlighted below, RRD should still be
able to generate free cash flow sufficient to continue to invest in
RRD's core strategic product lines and continue to deleverage the
Company. The above actions could also permit the Company to return
capital to stockholders in a prudent and sustainable manner,
whether through restoring the dividend or undertaking strategic
share repurchases. Further, aggressive deleveraging through
divesting non-core businesses and exiting geographies could provide
RRD the flexibility to pursue highly synergistic acquisitions to
support its growth businesses such as packaging, labels, and supply
chain management.
RRD Can Unlock Significant Value By
Improving Margins Through a Reduction in Costs
Given the state of the Company's performance, we believe that
one of the foremost goals of RRD and its management should be to
constantly strive to achieve further operational and portfolio
efficiencies. While we acknowledge the year-on-year improvements in
RRD's full-year 2020 adjusted EBITDA margins of roughly 150 basis
points on an as-reported basis, we also note that a significant
portion of this improvement was driven by the divestiture of the
Company's unprofitable logistics business
line.6 We believe significant opportunities
exist to reduce operating costs which will further improve RRD's
margins. We calculate, holding all else equal, that an
adjusted EBITDA margin improvement of approximately 100 basis
points could lead to a material increase in equity value to over
$12.00 per share. Although we
can only assess RRD and its peers through monitoring publicly
available financial statements, we believe this target is
achievable. We note, for instance, that although RRD has been able
to reduce its selling, general, and administrative (SG&A)
margins by some 50 basis points since 2016, its peer
set,7 on average, has achieved over 110 basis
points in margin improvement in that time. We believe this
represents a clear opportunity to improve operational efficiency,
and indeed that there are likely more opportunities to be
found.
RRD is in Gross Need of Revisions to its
Executive Compensation to Better Align Management's Compensation
with Actual Performance
Unfortunately, the fact that such dramatic value destruction
should go unaddressed at the Company only emphasizes what we
believe is the complete misalignment of incentives between RRD's
leadership and its public stakeholders. For example, in 2020, a
year in which many public companies were beset by the pressures of
the COVID-19 pandemic, RRD's shares declined 43%. Despite this
unprecedented decline, Daniel L.
Knotts, the Chief Executive Officer, was rewarded with a
7.7% increase in his total compensation, including a 44% increase
in cash incentive-based payments in the context of an
organic pro forma top line decline of 9%, and a 3.5% decline in pro
forma adjusted EBITDA.8 Even if one were to
consider only the CEO's non-adjusted "Actual Compensation" as
disclosed in the Company's proxy statement for its 2021 annual
meeting of stockholders (the "2021 Proxy"), it still reveals an
extraordinary year-on-year increase of
30.7%.9 For the sake of comparison, consider
that under the same time period, Quad's share price declined 18%,
while the total compensation for Quad's CEO decreased by 46%,
including a base salary reduction of 50% for 4
months.10
We are therefore forced to ask the distressing question:
Have the Board and management hitherto accepted—or worse,
welcomed—operational decay and stockholder value destruction while
enriching themselves? Is it possible that management
appreciates the share price devaluation at fiscal year-end, so that
they may purchase shares they know are undervalued? By the
Company's own admission in its statement regarding the poison
pill's renewal, it agrees with Chatham that its equity is undervalued. We
believe, therefore, that the Company's equity incentive program
must be reevaluated given current levels. Going forward, we propose
that equity incentives be awarded in the form of out-of-the-money
options, rather than time-vesting stock units. This action will
help assuage any fears of a misalignment between the interests of
Company leadership and investors and will further incentivize
aggressive action from Company leadership to address RRD's
undervalued equity.
The Path Forward for RRD
We continue to be supportive of RRD as a company and believe it
could once again generate great value under a refreshed Board. Our
present exasperation is due to a situation that we believe the
market recognizes, yet one that eludes Company leadership: To wit,
the Board and management have done little to address the massive
value destruction in both the long and short-term, content to
simply collect their unconscionable compensation and entrench
themselves. As we have repeatedly noted, even undertaking a
minimum of our suggested actions should have a material positive
impact on RRD's equity value. Since many of our concerns have
heretofore gone unheeded, we believe the only reasonable path
forward is to enhance the Board with two additional directors who
possess strong corporate governance and capital allocation
expertise to refocus the Company's strategy, streamline the
Company's operating cost structure, improve its capital allocation
policies, and better communicate to the market the Company's value
proposition.
We urge the Board to recognize the need for immediate change at
the Company and engage with us in a more constructive and
meaningful manner to preserve and maximize stockholder value. We
have no desire to engage in a distracting and expensive proxy
contest to replace directors on the Board or vote down the poison
pill at a special or annual meeting, but we will do whatever is
necessary to protect stockholder interests.
Sincerely,
/s/
Anthony R. Melchiorre
Managing Member
Use of Forward-Looking Statements
Certain statements
contained in this press release may be deemed to be
"forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934 and the U.S. Private Securities
Litigation Reform Act of 1995. All statements contained herein that
are not clearly historical in nature or that necessarily depend on
future events are forward-looking, and the words "anticipate,"
"believe," "expect," "potential," "opportunity," "estimate,"
"plan," and similar expressions are generally intended to identify
forward-looking statements. The projected results and statements
contained herein that are not historical facts are based on current
expectations, speak only as of the date of this press release and
involve risks, uncertainties and other factors that may cause
actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by such projected results and statements.
Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are
beyond the control of Chatham.
Although Chatham believes that the
assumptions underlying the projected results or forward-looking
statements are reasonable as of the date of this press release, any
of the assumptions could be inaccurate and therefore, there can be
no assurance that the projected results or forward-looking
statements included herein will prove to be accurate. In light of
the significant uncertainties inherent in the projected results and
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation as to future
results or that the objectives and strategic initiatives expressed
or implied by such projected results and forward-looking statements
will be achieved. Chatham will not
undertake and specifically declines any obligation to disclose the
results of any revisions that may be made to any projected results
or forward-looking statements herein to reflect events or
circumstances after the date of such projected results or
statements or to reflect the occurrence of anticipated or
unanticipated events.
1 All historical share prices based on closing prices
per Bloomberg historical price data. Share value change calculated
from July 28,
2021, to September 24,
2021.
2 As measured from September 30, 2016, to September 24, 2021.
3 Book value of owned land and buildings is as of RRD's
most recent 10-Q, filed August 4,
2021, for the period ended June 30,
2021.
4 See "R.R. Donnelley Is Said to Seek $800M in Asian Asset Disposal," Bloomberg
News, December 16, 2020.
5 The weighted average dividend yield of RRD's peers, as
identified in the Company's 2021 Proxy (as defined herein), is
2.3%. We have calculated the dividend yield based on 2019 financial
results, as many companies reduced or suspended their dividends in
2020 in response to the COVID-19 pandemic.
6 Pro forma the divestiture of the logistics business,
full year 2020 adjusted EBITDA margins improved some 80 basis
points year-over-year.
7 The peer set is comprised of RRD's compensation peer
group as identified in its 2021 Proxy.
8 CEO compensation per the 2021 Proxy. Results of
operations based on RRD public disclosures, and account for the
full disposition of RRD's logistics business line, which was
completed in the fourth quarter of 2020. On an as-reported basis,
revenues declined 24.1%, and adjusted EBITDA declined 7.6% between
2019 and 2020.
9 According to the 2021 Proxy, "Actual Compensation" is
comprised of: "2020 base salary, 2020 actual AIP payment, paid in
March 2021, and: (i) the value
realized upon vesting of RSU awards as of December 31, 2020 and (ii) the value of the
2018-2020 PSU awards based on the final performance factor of 99.4%
and stock price of $2.26 as of
December 31, 2021."
10 Per Quad/Graphic's proxy statement for its 2021
annual general meeting of stockholders.
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SOURCE Chatham Asset Management, LLC