Buying R.R. Donnelley Could Be a Bad Move for Xerox
R.R. Donnelley & Sons' (RRD) - Get Report plans to split into three separate companies may be changing as Xerox (XRX) - Get Report is reportedly looking into acquiring the printing giant -- a move that investors seem to like as shares of both companies jumped up during the trading session Tuesday. Xerox and Donnelley stock closed with nearly 2% gains, at $9.67 and $18.81, respectively.
But not everyone is so enthusiastic.
"I'm not sure buying a highly levered company like RRD is a smart move, unless that can get a huge cost saving out of the deal," Real Money contributor Tim Melvin said in an email interview.
Bloombergfirst reported that the talks between the two companies are at an early stage, but a deal could be announced before Xerox's own split is complete. On Jan. 29, Xerox announced it would separate to create two distinct entities: an $11 billion Document Technology company and a $7 billion Business Process Outsourcing company. The separation is expected to be complete by the end of 2016.
Before reports of merger talks ever emerged, R.R. Donnelley was already working to split itself into three public companies: R.R. Donnelley & Sons, LSC Communications and Donnelley Financial Solutions. The $3.95 billion company's split is expected to be completed before the end of 2016.
Melvin said using current deal earnings before interest, taxes, depreciation and amortization multiples, he believes R.R. Donnelley should be worth $25 to $27 per share, or $5.2 billion to $5.6 billion, adding that anything over that would be a "horrid deal" for Xerox. He said the new company will have about $27 billion of equity and more than $22 billion of long-term debt, assuming Xerox issues no new debt to finance a deal.
If the acquisition were to come to fruition, Xerox would merge some of R.R. Donnelley with its copier, printer and related-services business and the rest would go to the other entity, Bloomberg reported.
But TheStreet's Jim Cramer thought the potential acquisition story was a little premature.
"I don't think this necessarily is going to happen," said Cramer on CNBC's "Squawk on the Street," explaining that the deal may take too long to be complete because split mergers "take forever."
Calls to R.R. Donnelley regarding the potential merger were not immediately returned. In a statement, Xerox said it does not comment on market speculation.
For more on RRD, see the latest charts from Bruce Kamich here.
This article was first published on Real Money at 5:39 p.m. ET on July 12.