Chatham Asset Management Sends Letter To R.R. Donnelley
Friday, April 30, 2021 1:45 pm
CHATHAM, N.J. (News release) -- Chatham Asset Management, LLC ("Chatham"), a private investment firm which manages funds that beneficially own approximately 9.8% of the outstanding common stock and which is the largest bondholder of R.R. Donnelley & Sons Company, sent a letter to RRD Chairman John C. Pope, RRD President and Chief Executive Officer Daniel L. Knotts, and the Company's Board of Directors commending RRD on its recent strong operating performance and outlining proposed actions to further institutionalize the Company's shareholder base to receive proper recognition for this performance from the equity markets.
Specific proposals outlined in the letter include removing the Company's value destructive "poison pill," executing a modest stock buyback program, and conducting a non-deal equity roadshow to educate the institutional investment community on RRD's recent deleveraging and growth initiatives. As a longstanding, supportive shareholder of RRD, Chatham strongly recommends RRD undertake these actions to enhance value for all the Company's stakeholders.
The full text of the letter follows:
As R. R. Donnelley's largest equity shareholder and bondholder, Chatham Asset Management wishes to commend the management team on the company's recent operating performance. R. R. Donnelley's first quarter 2021 results were at the high end of the updated guidance range management provided in advance of the recent bond deal. Moreover, we think it bears repeating that management has admirably guided the company through the significant economic challenges presented by the COVID-19 Pandemic. As a testament to the company's exemplary recent operating performance, we note that the CDS (credit default swaps) spread has tightened meaningfully, from roughly 1,620bps in May 2020 to 475bps currently. Importantly, that spread tightening move to sub-500bps is technically significant as the credit shifts from "points upfront" to "spread." Further, short interest on R. R. Donnelley's equity has been reduced by roughly 2 million shares, and the short interest ratio has improved by nearly a day.
We also wish to congratulate management on the successful completion of R. R. Donnelley's new secured bond deal. Management, and in particular CFO Terry Peterson, executed the deal flawlessly. The debt maturity runway has now been meaningfully cleared. The bond deal is a great benchmark and will help with R. R. Donnelley's access to capital markets in the future.
The strange response of the equity markets to R. R. Donnelley's earnings release, which saw its stock price decrease over 20% in a day of trading, representing roughly $95 million in equity value, has been entirely illogical, but we believe it is instructive as to the nature of R. R. Donnelley's equity holders. In short, we believe R. R. Donnelley's only response should be to further institutionalize its shareholder base, which management and the board can accomplish in three ways.
First: the company should remove the "poison pill," which places an artificial cap on equity ownership and mutes institutional support for R. R. Donnelley in the equity markets.
Second: It would be helpful and advisable for R. R. Donnelley to execute a modest stock buyback and/or buyback program, as we have advised in December 2020 when the stock was around $1.50. As R. R. Donnelley's largest debtholder, we would support a $30 million (~10% of the equity market value) buyback program. While we appreciate management's commitment to prudent capital management through reducing debt and maintaining liquidity, nevertheless we believe the time is now to use a small amount of the company's ample liquidity to remove outstanding shares. This will signal to the markets and to institutional investors alike that management and the board have faith in the company's plan and are willing to invest alongside shareholders. Similar to the sub-500bps spread on CDS, a stock price greater than $5 per share will help promote institutionalization because of institutional investor preferences.
Third: we would recommend a non-deal equity roadshow in order to educate the institutional equity community on the sum total of recent deleveraging and growth initiatives.
In closing, we congratulate you and reiterate our long-standing support of R. R. Donnelley and its management team. It is in this spirit of support that we emphatically recommend the above actions to bolster institutional support for R. R. Donnelley more broadly. We strongly feel that the time is now to broaden the base and tell the story which would be in keeping with management and the board's custodianship of value for all the company's stakeholders. There is still work to be done.