Strategic Merger Between DCM and RRD Canada Sparks Industry Consolidation with Beneficial Synergies
DATA Communications Management Corp. (“DCM”) is a Canadian-based provider of marketing and business communication solutions to companies in North America. Its technology-enabled content and workflow management capabilities solve the complex branding, communications, logistics, and regulatory requirements of leading enterprises, so its customers can accomplish more in less time. Its services include printing, data & content management, labels & asset tracking, location-specific marketing, and multimedia campaign management.(1.0) COMPANY UPDATE: (1.1) DCM reported two events recently that were both positive for the Company valuation according to our model. (1.2) On February 22, 2023, DCM announced that it agreed to acquire the Canadian operations of R.R. Donnelley & Sons Company (RRD) for a cash purchase price of C$123 million. (1.3) The acquisition is expected to close in Q2/2023. It is subject to customary closing conditions and receipt of third-party and regulatory approvals. (1.4) In 2022, RRD Canada generated approximately $250 million in revenue with 10 locations across Canada and 1,000 employees. (1.5) Also, on February 22, DCM reported preliminary full-year financial results for 2022 with revenue in the range of $270 million to $274 million, a 15% to 16.5% increase compared with 2021, Gross Profit in the range of 30.5% to 31%, a 20% to 21% increase compared with 2021, and EBITDA in the range of $35.5 million to $36.5 million.
(2.0) FINANCIAL ANALYSIS & VALUATION: (2.1) We adjusted our model under the two scenarios: (i) 2022 annual revenue higher than our estimate and (ii) the merger with RRD Canada. (2.2) In Scenario 1, the revenue increase caused our Equal-Weighted Target Price (1 year) to increase to $4.59 from $4.44. (2.3) In Scenario 2, we adjusted our model to reflect the acquisition of RRD Canada and added $250 million in revenue, pro-rated to start in Q4/2023. The acquisition of RRD Canada caused our Equal-Weighted Target Price (1 year) to increase to $5.92 from $4.44. (2.4) The combined impact of the two scenarios caused our Equal-Weighted Target Price (1 year) to increase to $6.02 from $4.44. (2.5)However, until the full 2022 financials are released or the merger closes, we are maintaining a Buy rating and a one-year price target of $4.50.
Data Communications Management is an unincorporated, open-ended, limited purpose trust. Through its subsidiaries, Co. is engaged in the provision of total document management solutions including printed products. Co. offers a variety of print and electronic products and related services, which include traditional business forms, labels, direct mail products, security documents, commercial print, and facility and print management.
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