Inside the Deal for Goss

By Rosenberg, Jim | Editor & Publisher, January 25, 1997 | Go to article overview

Inside the Deal for Goss


Rosenberg, Jim, Editor & Publisher


While enthusiasm for new electronic media drove several highly publicized initial public offerings in the mid-1990s, confidence in conventional print media led to last fall's 1980s-style leveraged buyout of the biggest supplier of presses to U.S. newspapers.

Completed in October at a total expenditure of $628 million, the acquisition of Rockwell Graphic Systems by GGS Holdings Inc., a company formed by New York investment group Stonington Rartners Inc., relied heavily on debt. The value of the deal for what is now Goss Graphic Systems was put at $600 million, with an additional $26 million in transaction costs (including more than $6 million in fees and expenses Stonington paid itself for buying Goss) and $2 million more lent to management investors.

Half the $600 million was financed by debt: $75.3 million drawn from a bank credit agreement (including a five-year revolving credit facility for a further $149.7 million) and $225 million from the issue through CS First Boston Inc. of 12% senior subordinated notes, due in 2006. Annual debt service comes to $32 million.

The remainder of funding came from equity in the form of $116.5 million in common stock (95.7% held by a Stonington fund, 0.8% held by an affiliate of a limited partner of the fund and 3.5% owned by five top managers), $47.5 million in preferred stock issued to Rockwell International and $163.7 million from the sale of customer notes.

The 47,500 preferred shares represent Rockwell's equity position in Goss Graphic Systems. A consideration made in lieu of cash, the shares pay a 6.5% annual dividend, and Goss may cash out Rockwell's stake at any time, said Goss finance and administration vice president Eric Schroeder. As preferred shares, they are not tied to the company's value at any given time and their redemption is assured ahead of common shares and the subordinated notes.

Rockwell originally issued the customer notes in connection with financing it provided buyers of its equipment. Their purchase price was discounted from a face amount of approximately $238.2 million, and Rockwell included certain payment guarantees for the noses' buyer.

Though the Goss deal was valued at $600 million by both buyer and seller, the purchase price did not include the proceeds from the customer notes, according to Goss executives. At the time of the sale of the Graphic Systems division, Rockwell "wanted to unload those notes" it had not already sold.

The notes themselves did not fit in the transaction, according to Goss marketing and communications director Barbara L. Gora. Rockwell, she said, "used ... our sale as a pass-through to move the notes."

"We got the notes from Rockwell and sold them right away," said Schroeder. Their sale , Gora added, which "had nothing to do with" the new company, "just complicated the sale" and was not a source of funding for Goss.

In this view, subtracting the customer notes' purchase price from the value of the transaction boosts from one-half to more than two-thirds that portion of the price paid for the business with borrowed money.

Rockwell withdrew from customer financing in 1994, and Goss said it will help customers find third-party lenders rather than offer them financing itself.

While Moody's Investors Service saw only"moderate financial leverage," Goss described itself as "highly leveraged" and its notes as "high risk." Its prospectus states that much of its cash flow may have to be allocated to debt service, that it may face higher variable interest rates on some borrowing.

Moody's assigned a first-time rating of B2 to the notes and a Bal rating to the bank credit. The service said its ratings reflect Goss' vulnerability to "highly cyclical and volatile demand" that is "mitigated somewhat by ... strong geographic diversification"; a history of significant losses in the consolidating commercial printing press business; declining North American newspaper readership trends; risks associated with a decision to end customer financing; and separation from a strong parent company. …

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