2020 M&A Activity - Wide-Format Comes of Age

The wide-format printing industry is now “middle-aged,” as reflected in the M&A transactions over the past year. Tuck-ins, almost non-existent in the wide-format segment a few years ago, are now common. Years went by without a single bankruptcy filing, or non-bankruptcy closing by a company specializing in wide-format printing; while not a predominant trend, we noted four such events in 2020. Wide-format printing technologies are now widely deployed, with nuanced specialized variations serving niche markets. Barriers to entry at the lower end of the market are greatly reduced. Franchised operations have proliferated. The collective result of these trends is that robust competition exists up and down the scale at all price points, and within specialized wide-format niche deliverables.

The M&A transactional and closure trends are clear signals that the wide-format segment has matured, and success in the future will increasingly depend on delivering a value proposition to customers that is more meaningful than just owning a wide-format printing device. The industry’s salad days are now firmly in the past.

That trend was evident before the virus hit; The outbreak of COVID-19 and resultant social shutdowns slammed into several segments that drive demand for wide-format products: every type of entertainment event including sports, concerts, theater, business conferences, retail display, and trade shows. The falloff in M&A activity was immediate, and spanned the entire gamut of printing industry segments. Despite the challenges forced onto everyone by social distancing, however, successful companies got right back into the game and commenced closing deals throughout the summer and fall, with several transactions occurring in the wide-format segment. By the end of the year, more deals had closed in the printing and related industries during 2020 than had been completed in 2019. Many of the acquisitions were in the first two months, with a big gap in activity in March, April, and May as would be expected. Notably, tuck-ins picked up after the initial hard shutdown.

The Rationale of Wide-Format M&A

When we look back over the past few years to see where the transactional activity has been occurring and trending, a pattern emerges. There are still transactions involving generic producers of banners and signs, however buyer interest is in more specialized retail graphics, in-store display, outdoor advertising, and consumer-facing interior décor printing companies. As noted above, most of these transactions involving healthy companies occurred before the COVID-19 virus broke out, which has greatly impacted retail and events of all types. We expect that there will be a “wait and see” period, during which wide-format companies serving retail and events take a step back from strategic acquisitions, while retail shopping and event activity resumes.

We note that after the virus broke out, tuck-ins have been the dominate transaction structure in the wide-format segment, at least based on number of transactions, if not on revenues and deal size metrics. We expect the hit to demand in retail and events will begin to have a detrimental effect on mid-size and smaller players in the wide-format segment. Clearly the government PPP loan program was helpful, and the industry has proven to be very resilient, at least for the short term. That said, it is hard to see how there will not be some fallout as the impact of the economic downturn works its way through the industry.

We know from our data that in the general commercial printing segment, three out of every five transactions are structured as a “tuck-in.” In these deals, the buyer folds the acquired customers into their existing production capacity, hires selected qualified employees with special focus on those people that touch the customer, and maybe cherry-picks some of the equipment. The seller is left to close up shop, sell off the remaining equipment, and wind-down the business entity. The result is almost always a reduction in production capacity.

The wide-format segment is catching up; in 2020, approximately two out of every five transactions resulted in the closure of the acquired facility and corresponding tuck-in of the business to the buyer. The maturing nature of the wide-format segment means that this trend will continue and be exacerbated further by fallout from COVID-19, at least for some time in the near future. The adoption of wide-format technology by many general commercial printing companies adds competitive pressure to the companies solely focused on wide-format services. Failures or tuck-ins within the commercial printing segment surely includes some consolidation not picked up in our wide-format stats, meaning that the actual percentage of tuck-ins and closures involving some portion of wide-format services is likely higher.

Product Specialization Drives M&A Transactions

As we noted last year, savvy investors and strategic buyers were snapping up wide-format companies that had successfully carved out a defensible niche serving a well-defined customer base via clear market channels. Consistent with this strategy, H.I.G. Capital’s portfolio company Circle Graphics kicked off 2020 by acquiring Metromedia Technologies, an industry pioneer in high-quality, digitally printed billboards. (Before Metromedia, billboards were produced by workmen climbing up and pasting together 30 or more large offset press sheets, and before that by artists hand painting while suspended by ropes or hanging onto ladders.)

In addition to out-of-home advertising, Circle Graphics has a second division that produces wall décor products sold online via reseller relationships. In September, Circle Graphics jumped back into the M&A mix with the acquisition of California-based Bay Photo, a wide-format and photo company that caters to professional photographers and consumers with personalized wall décor products. With several locations and more than 600 employees, Circle Graphics combines size and specialization to compete in the maturing wide-format market, utilizing strategic M&A to grow in its chosen niches.

Vomela, a serial acquirer of printing companies, began 2020 with the purchase of the fleet graphics division of Implementix in Colorado. Based in St. Paul, Minn., Vomela has more than 20 locations across the U.S., and announced that the majority of the production acquired from Implementix would be tucked-in to its existing facility in High Point, N.C. The company has its roots firmly planted in wide-format printing specialties, including significant capabilities in vehicle and truck graphic decoration. Other niches served that take Vomela out of the roiling competitive mix include building wraps, in-store graphics and product displays, event graphics (when they come back), recreational vehicle markings, and kiosk decoration.

TC Transcontinental, the Canadian printing giant, took another step into the wide-format business with the acquisition of Artisan Complete in Markham, Ontario. Formerly focused on newspaper and magazine publishing and printing, TC transformed itself into one of the leading North American producers of flexible packaging, which now represents more than half its business. The transition strategy was deliberate and publicly articulated, beginning in 2014 and followed up with several laser-focused acquisitions of flexible packaging companies. At the same time, TC divested multiple newspapers, magazines, and associated printing plants. In what seemed like an anomaly and departure from strategy, TC acquired Mississauga, Ontario-based Holland & Crosby in October 2019. The purchased company specializes in wide-format printing and in-store display. The January 2020 acquisition of Artisan Complete made it clear: TC Transcontinental has added wide-format and in-store display as another leg of its strategic transformation plan.

Other pre-virus acquisitions that illustrate this trend of a successful focus on serving unique niches within the larger wide-format printing segment include Georgia-based Outdoor Image acquiring Kramer Graphics in Dayton, Ohio, as well as Florida-based GSP’s acquisition of Custom Color in Lenexa, Kan. Both transactions combine companies with wide- and grand-format capabilities, and announced plans to maintain production at the acquired company’s facility.

Once again, we observe that product and service specialization are the key factors that drove buyers’ strategic reasoning behind many of the M&A transactions. Geographic territory expansion also played a role in the M&A activity in the wide-format business. Given the need to deliver and install many of the products that make up the wide-format industry, location has often been a key factor behind an acquisition.

Two of the acquisitions over the past year were motivated by the addition of specific wide-format services. Three primarily achieved geographic expansion for the buyer. Three of the deals were backed by private equity (two by Circle Graphics, sponsored by H.I.G. Capital) and significantly, the purchase of Skyline Displays by Gemspring Capital created a new platform company for the private equity firm, all of which portend more acquisitions to come in the wide-format segment.

Equipment & Wide-Format Supply Distributors

The traditional paper-centric distribution companies continue to seek opportunities in the sale of wide-format supplies to augment their shrinking printing papers business. Spicers Canada, a division of Central National Gottesman, acquired All Graphic Supplies, expanding its position in the distribution of wide-format supplies and equipment.

Esko shed its flatbed digital cutting business, no longer a unique offering in what has become a crowded field of “me-too” cutting and routing machines. Durst, headquartered in Italy, acquired a majority position in Georgia-based Vanguard Digital Printing Systems, expanding and strengthening its presence in the U.S. wide-format industry.

Looking Forward

We suggested last year that the wide-format business had reached the level of maturity in which the “haves” and the “have-nots” would begin to emerge, and positions would solidify. Larger, well-heeled companies and investment firms will pick off winners in highly differentiated and specialized sub-segments, while the more generalized and undifferentiated companies will experience margin compression. Consolidation within the wide-format segment will accelerate, slowly at first, but will pick up. We gave several reasons, all of which are still in play.

We noted that franchise systems and companies are now selling wide-format printed products online and have systemized and captured the low end of the market. A Google search of “lawn signs” or “banners” yields top results that emphasize low price and free shipping. The Amazon Effect had come to generic products produced by wide-format printing. The easy pickings have been picked. Still true.

Digital wide-format printing equipment is now more affordable at all levels of quality and ability to print on just about any substrate you can imagine. Computer-driven flatbed cutters and routers, which seemed magical a decade ago, are now ubiquitous must-have devices installed in any serious wide-format shop. At the last trade show I attended, there was a dizzying number of available wide-format printers and flatbed cutters. If there is any doubt that these machines are being commoditized, just consider that Esko sold off its line of Kongsberg digital cutting systems, stating that the company intended to focus on packaging workflow solutions. As I wrote last year, the mission of machine manufacturers is to sell machines, and that is what they do in every segment of the printing industry; they sell more machines at lower and lower prices, leading to production overcapacity. Still true.

As noted above, many commercial printing companies have added — and will continue to add — wide-format printing capabilities. Absent the specialization we see in companies such as Circle Graphics, Vomela, or one of the other companies figuring out product differentiation and how to serve niche verticals, these general commercial printing companies continue to push the wide-format segment into its middle age. Still true.

As we can see from this year’s M&A activity, especially looking at the pre-virus deals, sophisticated buyers are finding opportunities to grow and profit in the wide-format printing business. Established wide-format printing companies will find the market for their services increasingly competitive. Companies able to differentiate themselves with value-added specialized capabilities serving defined market segments will achieve higher company values. Companies that stay nimble and fresh, differentiated, and highly profitable will remain the premier partners in the M&A dance. The dancers that succumb to the aches and pains of middle age will find slimmer pickings when it comes to finding attractive dance partners, or be left on the sidelines to watch.