Market Maturity Brings M&A Activity Forward in 2020

Last year at this time we noted that the wide-format printing industry had matured, and the barriers to entry at the lower end of the market were greatly reduced. That trend has continued; however, savvy investors and strategic buyers have been snapping up wide-format companies that successfully carved out a defensible niche serving a well-defined customer base via clear market channels.

Looking back over the past year, we see product and service specialization are the key factors that drove buyers’ strategic reasoning behind many 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.

Product Specialization Drives Transactions

M&A activity in the wide-format segment — looked at by the number of transactions — was off slightly over the past 12 months, as compared to the prior year. However, 2019 was the year that serious money interests discovered the wide-format printing segment. The M&A activity in the past year was characterized by larger transactions, many with backing from private equity firms.

H.I.G. Capital, which has invested across many segments of the printing services industry, acquired Circle Graphic Holdings, the powerhouse printing company in the outdoor advertising and billboard industry. This transaction is a clear example that illustrates that the spate of recent acquisitions in the segment by major players focused on companies that carved out a clear product or service specialization.

According to Circle Graphics’ website, its three manufacturing facilities comprise 400,000 sq. ft. of production space, with an ability to process 20,000 files every day and produce in excess of 300 sq. ft. of printed product annually. That’s intense focus. The company has also made significant inroads into another wide-format specialty, the rapidly growing market for personalized décor products including canvas prints, wallpaper, and household items such as pillows. H.I.G. Capital — one of the largest global private equity funds — now has multiple investments in print-centric companies, including direct mail and marketing, branded sportswear, online digital printing sites, fine paper manufacturing, as well as now having voted its confidence in the wide-format printing segment.

H.I.G. Capital is not the lone private equity fund that believes in the future of print. Sign-Zone, a portfolio company owned by Chicago-based Pfingsten Partners, acquired Xarisma. The acquired company based in Huntsville, Ala., specializes in custom fabric production, with products including flags, banners, tents, displays, and other specialty products such as fabric table covers. Sold through distributors, the company not only prints many display products, but also sells many of the accessories and devices needed to mount, hold, light, and otherwise deploy graphic signage and displays. Pfingsten Partners, like H.I.G., also has multiple investments in printing service companies, including a multi-state roll-up in the folding carton segment. Product specialization and expertise are the common threads connecting Pfingsten’s investments.

Merchants Capital acquired Modagrafics as its “platform company” to enter the wide-format printing business, “platform” indicating that additional acquisitions will be forthcoming to build out this provider of fleet marking services. With the evolution of wide-format printing capabilities, the business of branding trucks now means super high-fidelity graphics that cover entire sides, backs, and even tops of 53-ft.-long trailers. These moving billboards are complemented by full vehicle wraps that convert delivery vans into full-color photo-quality advertisements. A second specialization, OEM markings, printed by Modagrafics, adorn heavy machinery, including Caterpillar machines and trucks, some as big as a house. A third Modagrafics specialization is store décor and product displays, both temporary and permanent.

Building Out Multi-Regional Footprints

There is a trend in the commercial printing segment in which a regional player that has established a strong core geographic base strikes out to grow strategically by establishing a stake in a new region and then building out from there with additional acquisitions. This regional expansion strategy has been methodically executed by Drummond, a commercial printing and graphic services company headquartered in Jacksonville, Fla. Through a series of acquisitions, beginning in 2012, Drummond has built out a considerable commercial printing presence in the greater Atlanta, Ga., metropolitan area. Most recently, Drummond acquired PSP Retail, with 90,000 sq. ft. of production space in Decatur, Ga. The acquired company produces in-store graphics and signage. According to the CEO of Drummond, the acquisition resulted in “two complementary operations” in the Atlanta market.

New Jersey-based Sandy Alexander, long a major force in the commercial sheetfed and web offset printing business in the New York metro market, has remade itself, and is now a significant supplier of wide- and grand-format printing services. Earlier this year, “Sandy” as the company is known locally, cemented its wide-format position more firmly in the New York region with the acquisition of Signmasters. The acquired company was an established provider of retail in-store signage for major national brands.

Sandy already had established a second geographic footprint in Florida, with a web printing facility in operation there for many years, further strengthened with the acquisition of Designer’s Press in 2017. Although not an acquisition in the traditional sense, in September 2019, Sandy announced that it was now “Bi-Coastal” with the opening of a Burbank, Ca., manufacturing facility specifically “focused on high-quality wide-format print.”

The Rationale of Wide-Format M&A

When we look back over the past couple of years to see where the transactional activity has been occurring and trending, a pattern emerges. The more generic producers of banners and signs, while not falling totally out of favor, are now evenly matched with buyer interest in, and acquisitions of, the more specialized retail display companies.

We know from our data that in the general commercial printing segment, three out of every four transactions are structured as a “tuck-in.” 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 wide-format segment is different; less than one in five transactions result in a closure of the acquired facility and corresponding tuck-in of the business. In most cases, the acquired company is maintained as an operating facility, a clear indication that buyers see continued growth and opportunity in wide-format (an excessive number of tuck-ins is indicative of a shrinking, consolidating segment within the industry).

Two of the acquisitions over the past year resulted in the buyer adding wide-format services. Two transactions primarily achieved geographic expansion for the buyer. Four of the deals were backed by private equity and significantly, three of those were new platform companies for those private equity firms, portending more acquisitions to come.

Looking Forward

The wide-format business has now reached the level of maturity in which the “haves” and the “have-nots” will begin to emerge. Positions will 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, nonetheless. The reasons are several.

Franchise systems and companies selling wide-format products online 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 has come to generic products produced by wide-format printing. The easy pickings have been picked.

Digital wide-format printing equipment is now more affordable at all levels of quality, and 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. Attendees to the recent PRINTING United show in Dallas could choose from a multitude of manufacturers of highly functional printing and finishing devices. Since the mission of machine manufacturers is to sell machines, they will do what they do in every segment, which is to sell more machines at lower and lower prices, leading to production overcapacity.

Many, if not the majority, of commercial printing establishments now offer wide-format printing services. What was once an opportunity to offer clients a new service in which gross margins were significantly better than in the core offset business of most commercial printers has now become one more competitive segment of the graphics communications industry. Once seen as a unique high-margin additional service that commercial printers could offer, wide-format printing may very well be a necessary defensive move in some of the more concentrated print markets. The lines between commercial printing and wide-format providers have blurred, and as commercial printing continues to consolidate, it will drag those wide-format printing services right along with it.

As evidenced by the data from this year’s M&A activity, sophisticated buyers still see opportunity to grow and profit in the wide-format printing business. However, established wide-format printing companies will find the market for their services increasingly competitive. Companies that are able to differentiate themselves with value-added specialized capabilities serving defined market segments will achieve higher company values. As we noted last year, in the competition to remain a high-margin darling within the larger print-centric graphic communications industry, the differentiated wide-format printers will remain the chosen partners in the M&A dance.