Clock ticking on American Color

Printer struggling with debt load, falling revenue - is private equity deal next?

Email | Print By Glenna DeRoy

Laboring under a massive debt load, American Color Graphics Inc. last week bought itself some time, but the company’s outlook remains tenuous.

In its quarterly filing with the SEC, the troubled Brentwood printer said it has negotiated a one-month reprieve on various debt payments. But it added that it expects to be able to meet its obligations only until March 13.

American Color lost $7.2 million last quarter on revenue of $119 million. During the quarter, it paid out more than $11 million in interest to its lenders, Bank of America chief among them. Through the first nine months of its fiscal year, the company lost $26.7 million on revenue of $326 million. During that time, interest costs on its $380 million of debt all but wiped out gross profits.

The debt payment extension – which cost American Color $650,000 and delayed, among other things, the repayment of a $5 million supplemental loan that had been due Feb. 15 – gives CEO Stephen Dyott and CFO Pat Kellick some breathing room. But they are still faced with the same – often drastic – options they began contemplating when they hired Lehman Brothers last fall.

Those ‘choices’ include refinancing credit lines or issuing new debt – improbable given the current market – selling out altogether, agreeing to a debt-for-equity swap or seeking further waivers and extensions from their lenders.

Kellick did not return repeated calls for comment. He and Dyott last July saw a merger with Baltimore-based Vertis Communications as a way out of their quagmire. But Vertis – larger than American Color but equally awash in debt and red ink – called off the deal in October.

That stumble epitomized the state of commercial printing in North America, where market leader Quebecor World is bankrupt and trying to get its operations back in order.

Further clouding American Color’s outlook is that its gross margins are just 10 percent – Vertis’ are double that – and sales have fallen 17 percent in the past five years, whittled down by price competition and falling demand. The company last posted a full-year profit during its fiscal 2002.

“If it is a more long-term problem, and they’re operating long-term at a loss, then they can’t survive,” said Germain Boer, a professor at the Vanderbilt Owen Graduate School of Management.

Boer said a debt-for-equity swap would rid the company of its interest payments, but he cautioned that new owners might want to come in and change operations.

Linda Costello, managing director at Avondale Partners in Nashville, said American Color’s management could look to the private equity market for relief.

“It depends, of course, on what kind of story they are able to tell and what the value would be for a private-equity investor,” she said. “A lot of funds have raised a lot of money and they are looking for deals. There at least ought to be a lot of listeners out there for their story.”

But even a private-equity solution will have to fight strong market headwinds to succeed. Gordon Pollock, managing director of investment banking firm Morgan Joseph & Co., said American Color is a microcosm of the financial climate of the last six to eight months – which doesn’t bode well for its prospects.

“In the broader scheme, we’re not seeing big-leverage buyouts getting done,” he said. “There used to be the market for it. You would go put a bunch of debt on a company, and then as long as the company performed normally, you could go do another refinancing and extend the term. There’s no market to do that right now.”