Monday, December 12, 2016

Diversification into another business (looking at Ennis Inc's entry into, and exit out of, the apparel business)

ARC is the only publicly-traded “reprographics” company, but, from time to time, I do look at publicly-traded “printing” companies, just to see how the “printing” industry is fairing (at least from the perspective of publicly-traded printing companies.)

It is not uncommon for companies to buy (acquire) businesses that aren’t directly related to their traditionally operated (i.e., “core”) businesses.  This sometimes happens because the growth outlook for a company’s core business isn’t deemed to be fantastic, this sometimes happens because the business to be acquired “appears to provide” some sort of synergy with the company’s core business, and, yes, this sometimes happens simply because management gets bored with its core business.  Whatever the case, the term, “diversification” is the one used to describe a company’s move (i.e., expansion) into a non-core business.  And, sometimes this works, but sometimes it does not.

The company featured in this blog post is Ennis, Inc., an NYSE-traded company.

Being an older person, I well-remember Ennis from its days as one of the country’s premier business forms manufacturers.  In fact, years ago, I was an Ennis customer (bought multi-part invoices and statements to run through our computer printers) and an Ennis re-seller (occasionally took orders for business forms, which we subbed out to Ennis.)

In 2004, Ennis ventured into the apparel business, buying Alstyle Apparel for $242 million.  In 2016, Ennis exited the apparel business, selling Alstyle for $110 million.  From an accounting perspective, no, Ennis did not report a $132 million loss on the sale of Alstyle.  Its loss was much lower, due to the fact that, during the 12 years Ennis owned Alstyle, it took deductions for depreciation and amortization.

Apparently, the acquired “apparel” business fit (pun intended) for approximately 12 years.

Subsequent to the sale of Alstyle Apparel, Ennis is in much better shape financially.  Kudo’s to Ennis’ management team for making the right decision….finally.

One point I’d like to make to reprographers, to those who are exploring ideas to diversify their businesses.  (And, many are, simply because traditional reprographics is in a declining trend.)  Be very careful about buying into industries you know little about.  Just because something “sounds cool”, doesn’t mean it will be profitable….. or worth the time spent or money invested.)

June 2004 - Ennis buys Alstyle Apparel
Ennis, Inc., the Midlothian, Texas-based business forms company (NYSE: EBF) reported that it will buy privately held Alstyle Apparel for $242 million in stock and debt. Ennis plans to issue 8.6 million to 8.9 million shares for the deal with an estimated per-share price of about $15.60, according to the company. The deal also involves taking on about $104 million to $108 million in Alstyle debt.

May 2016 – Ennis sells Alstyle Apparel
Midlothian, TX, May 4, 2016 — Ennis, Inc. (the “Company”), (NYSE: EBF), today announced that it has accepted a superior offer to sell Alstyle Apparel, LLC and its subsidiaries, which constitute the Company’s apparel division (the “Apparel Division”), to Gildan Activewear Inc. (“Gildan”) and that it has terminated its previously announced sale agreement with another buyer, all as more fully described below. Sale of Apparel Division:
In connection with the superior offer, the Company and Gildan have entered into a Unit Purchase Agreement, dated May 4, 2016 (the “Gildan Purchase Agreement”), pursuant to which Gildan will acquire the Apparel Division from the Company for an all-cash purchase price of $110,000,000, subject to a working capital adjustment, customary indemnification arrangements and the other terms of such agreement (the “Gildan Transaction”). The closing of the Gildan Transaction, which is anticipated to occur by the end of the Company’s second fiscal quarter, is conditioned upon customary closing conditions, including applicable regulatory approvals. Following the closing, the Company will provide transition assistance to Gildan for certain administrative, financial, human resource and information technology matters and will sublease from Gildan a portion of a certain property located in Anaheim, California that is leased by the Apparel Division. As part of the purchase price, Gildan has funded the Company’s payment of the $3,000,000 termination fee payable to the initial buyer of the Alstyle Division in connection with the termination of the initial purchase agreement with such buyer, as more fully described below. Prior to the Gildan Purchase Agreement, on April 1, 2016, the Company had entered into a Unit Purchase Agreement (the “Initial Purchase Agreement”) with Alstyle Operations, LLC (the “Initial Buyer”) and, for the limited purpose set forth in such agreement, Steve S. Hong. Under the Initial Purchase Agreement, the Initial Buyer had agreed to acquire the Apparel Division from the Company for an aggregate purchase price of $88,000,000, consisting of $76,000,000 in cash to be paid at closing, subject to a working capital adjustment, and an additional $12,000,000 to be paid pursuant to a capital lease covering certain equipment utilized by the Apparel Division that was to have been retained by the Company. The Initial Purchase Agreement also contemplated post-closing transition services and a sublease similar to those contemplated by the Gildan Purchase Agreement. Under the Initial Purchase Agreement, the Company had retained the right to terminate such agreement in the event that the Company were to receive an unsolicited purchase offer for the Apparel Division which was not matched by the Initial Buyer that, in the judgment of the Board of Directors of the Company in the exercise of its fiduciary duties on behalf of the Company’s stockholders, constituted a superior offer to the transactions contemplated by the Initial Purchase Agreement. Pursuant to its retained termination right and after the expiration of the time period during which the Initial Buyer was permitted to deliver a matching proposal, on May 4, 2016 and prior to entering into the Gildan Purchase Agreement, the Company terminated the Initial Purchase Agreement and paid the required $3,000,000 termination fee to the Initial Buyer in connection therewith.

Keith Walters, the Company’s President, Chief Executive Officer and Chairman of the Board, commented by stating, “given the higher purchase price offered by Gildan and the fact that the entire purchase price is payable in cash at the closing of the Gildan Transaction, we believe that the sale of the Apparel Division to Gildan represents a superior offer for the Company and our stockholders. As previously noted, given our strategic direction to focus on the further expansion of our Print Segment, the Apparel Segment was deemed to be a non-core asset. The sale of this non-core asset allows us to fully focus on our core business segment and to be able to utilize the cash from the sale of Alstyle Apparel to further expand this business segment through strategic acquisitions, through which we have been able to continually demonstrate excellent returns to our stockholders. In addition, given our current leverage position, the Board may also consider other uses of these funds such as, paying down debt, additional share repurchases of our Company stock, and the return of capital to our stockholders in the form of a one-time special dividend. We are extremely excited about what the sale of this non-core asset means to the Company. It will not only further strengthen one of the strongest balance sheets in the industry, but will allow us to proceed aggressively with our strategic direction for the Company.”

Also mentioned in May 2016 - Loss to be reported on Sale of Alstyle:

The Company previously announced its financial results for the quarter and fiscal year ended February 29, 2016 in the Company’s Form 10-K filed on May 11, 2016. Based on presently available information, on a preliminary and unaudited basis, the Company anticipates that it will incur a pre-tax loss on the sale of the Apparel Division to Gildan of between $25 million and $35 million. Based on certain tax elections expected to be made, the Company is expecting to be able to treat the loss as an operating loss for tax purposes.

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