Xerox Rebuffs RR Donnelley Merger Proposal

Editor's Note: This article originally appeared in Printing Impressions, a sister brand to Print+Promo.

CHICAGO — The merger talks between Xerox Corp. and RR Donnelley (RRD) are not going to come to fruition, at least not in the short term, after Xerox privately rejected an offer from the nation's largest printer, the Wall Street Journal reported.

According to the newspaper, RR Donnelley proposed that its executives take control of the combined operations. The printer also sought several hundred million dollars in new cost cuts, the Journal said.

The proposed deal would have been structured as a Reverse Morris Trust, a tax-efficient approach that would enable RRD to reap a small premium. RRD's executives reportedly would have taken control and Xerox would have absorbed several million dollars in cost cuts.

After a review by its advisors, the Journal indicated that Xerox informed the printer on Thursday that it was not interested in the proposal, believing its own break-up plan into two companies has fewer risks.

Attempts to reach representatives for RRD have been unsuccessful. Xerox has said it will not comment on market speculation.

With both companies splitting into reconfigured businesses, it's not unusual for such talks to be held. Still, experts do not see a clear path toward a deal. Ben Stoto, the director of research for CNBC's Mad Money, believes both concerns will conclude that an acquisition is not in either company's best interest.

"RR Donnelley would likely want somewhere in the neighborhood of $25-$30 per share to agree to any deal … I say that range because both the company and analysts that cover it think it could be worth that much after the break-up plays out," Stoto told Printing Impressions. "So that implies a purchase price of $5 billion to $6 billion. Xerox currently has just over $1 billion of cash on its balance sheet, which means it would need to borrow the remainder of the funds, which would be a problem, considering that it already has $7.4 billion in total debt — more than $2 billion of which is current debt, meaning it’s due within the next year.

"And, that’s not even considering the $3.5 billion of debt that R.R. Donnelley has — $500 million of which is current — that Xerox would have to assume."

Absent an all-cash deal, RRD shareholders would need to accept Xerox stock, "and why would anyone want to do that?" Stoto mused. Conversely, there would be little benefit to Xerox in such a deal as well, "a secularly declining business to combine with its own secularly declining business, to make a company that is all of a sudden even more highly levered than it was before. Not an attractive company to pitch investors," he added.

The deal is not in RRD's best interest for a number of reasons, Stoto contended. Even if Xerox could swing the $25-$30 per share, "all the time that management would spend trying to make this deal happen is time that they’re not focusing on executing their own value-creation plan (the separation), which shareholders already like.

"So, at the end of the day, it’s just not worth it for anybody."