MONTREAL - Printing company Transcontinental Inc. (TSX:TCL.A) is dramatically reducing its U.S. presence after agreeing to sell its American direct mail operations to IWCO Direct of Minnesota for an undisclosed price.
The Montreal-based company said it decided to exit the troubled U.S. business after 12 years to focus on its core printing, publishing and media operations which are located primarily in Canada. Transcontinental CEO Francois Olivier said the company acted because it didn't want to lead this industry's much-needed consolidation.
"We feel that our core business of printing in Canada, publishing in Canada and building this marketing services sector is more strategic for Transcontinental as opposed to be the direct marketing consolidator in the U.S.," he said in an interview.
Discussions with its largest direct marketing rival began last summer after Transcontinental approached IWCO. Transcontinental had considered purchasing the privately held company when it was sold two years ago.
The cash sale is expected to close in April. Proceeds will be used mainly to pay down debt.
The sale will leave Transcontinental with U.S. operations that generate more than $120 million in annual revenues. In addition to a plant that prints the San Francisco Chronicle, it will retain marketing company Rastar, acquired last year.
Transcontinental also exports about $200 million of printed material such as books, catalogues and magazines to the United States. The Canadian company has billed itself as the only direct marketer with a North American geographic platform.
With the sale, it will shed its operations in Warminster and Hamburg in Penn., and in Fort Worth, Texas and Downey, Calif.
Olivier said Transcontinental's position as Canada's largest direct marketer won't be hurt by the sale.
"We don't have a lot of customers that we were servicing on both sides of the border, so we don't anticipate any impact on our strong Canadian operations."
The U.S. direct marketing business has taken a beating in the past year. Half of its business is tied to the financial services sector, which has struggled in the face of the deep recession.
Revenues dropped to US$153 million last year from a peak of US$250 million. Its annual capacity was slashed 40 per cent to about three billion pieces after it consolidated its operations and cut 1,000 jobs.
Drew McReynolds of RBC Capital Markets expects the pre-tax proceeds from the sale will be around $50 million.
He said the sale was a surprise but the rationale makes sense.
"Management believes the growth outlook has permanently changed for this business post the financial crisis," he wrote in a report.
Despite the challenges, Olivier said the company's departure from U.S. direct marketing doesn't mean the effort was a mistake.
"It's just aligning our strategy to what we feel will yield more value for our shareholders going forward," he said.
Transcontinental entered the U.S. direct marketing business in 1999 through the acquisition of Spectra Graphics. It was followed by two subsequent additions through 2005.
IWCO president and CEO Jim Andersen said the acquisition "provides a robust national total package footprint for our customers seeking innovative and cost-effective programs."
Transcontinental is the largest printer in Canada and the sixth largest in North America. It is also Canada's leading publisher of consumer magazines and French-language educational resources as well as the country's second-largest community newspaper publisher.
Last year the company posted fourth-quarter earnings of $43.1 million, compared to a loss of $94.3 million in the same period of 2008, when it wrote down goodwill related to the U.S. direct mail operations as well as restructuring charges.