Donnelley ÷ 3

November 23, 2016 09:00 AM
On the first trading day of October, RR Donnelley & Sons (RRD), the owner of the Edgar financial-statement wire service — trading at $23.81 with a market capitalization of $1.7 billion — split into three publicly traded companies after acquisitions led to
Donnelley ÷ 3

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On the first trading day of October, RR Donnelley & Sons (RRD), the owner of the Edgar financial-statement wire service — trading at $23.81 with a market capitalization of $1.7 billion — split into three publicly traded companies after acquisitions led to separate strategies for its main business. 

The largest of the new companies (the parent) will comprise RR Donnelley’s corporate-communications operation. The book and periodical-publishing division (spin-off #1) will be called LSC Communications (LKSD), trading at $28.61 with a market cap of $900 million. Edgar Online,  Bowne Financial and financial-printing operations formed the second spin-off and is named Donnelley Financial Solutions (DFIN) trading at $22.97 with a market cap of $745 million (see “DFIN Valuation,” below). RR Donnelley completed the tax-free distribution of 80.75% of both LSC Communications and Donnelley Financial on Oct. 1, 2016. RR Donnelley retained 19.75% of both spin-offs that will be disposed within 12 months (see “Post spin-off,” below). 

RR Donnelley & Sons provides commercial and digital print, direct mail, labels, statement printing, forms, logistics services and print management products. LSC Communications produces and distributes magazines, periodicals, catalogs, books, office products and directories. Donnelley Financial Solutions helps clients create securely store, localize, analyze and disseminate critical business content. The firm serves three sectors: Global Capital Markets, Global Investment Markets and Language Solutions. With about $1 billion in revenues in 2015, Donnelley Financial Solutions offers the most upside for investors. 

Both spin-offs will help increase management’s focus on each business by pursuing tailored business strategies leading to more organic growth opportunities. Of the three new companies, we are bullish on Donnelley Financial Solutions (DFIN) given its leading market position and strong free cash flow due to an asset light business model. Our fair value for Donnelley Financial Solutions is $38 per share, implying 65% upside from the current market price of $22.97, as of the closing on Oct. 3.

About the Author

Joe Cornell is a chartered financial analyst, a finance MBA and the author of McGraw-Hill’s “Spin-Off To Pay-Off.” As the founder and publisher of Spin-Off Research (www.spinoffresearch.com) he is widely-regarded to be among the foremost experts in this specialized area. @spinoffresearch