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American Greetings gets a boost from PE firm Clayton, Dubilier & Rice

Zev and Jeffrey Weiss

February 16, 2018

By: Mark Scott

Who: American Greetings

What: Old-line PE firm CD&R buying controlling interest from Weiss family

Why it matters: As the greeting card industry continues to struggle, a seasoned operator sees potential for a big payday

 

What’s the right card to buy when your 112-year-old business has just been sold?

After more than seven months of research and due diligence, New York-based Clayton, Dubilier & Rice announced a deal last week to acquire a majority interest in American Greetings Corp.

CD&R views American Greetings as a strong fit with its consumer and manufacturing experience. The private equity firm plans to bring a renewed strategic focus to the company, the market leader in the $6 billion North American greeting card industry.

American Greetings can benefit from CD&R’s expertise in corporate restructuring,” says Marisa Lifschutz, a greeting card industry analyst at the Los Angeles-based global business intelligence firm IBISWorld. “This deal, which is closing at the right time for the start of American Greetings’ fiscal year, could improve the company’s long-term operating performance by raising profit margins and provide a fresh start in a stale market.”

CD&R will acquire a 60 percent ownership stake in the company. The Weiss family, descendants of founder Jacob Sapirstein, will retain a 40 percent stake in the business. Zev Weiss and Jeffrey Weiss, current co-CEOs, and Morry Weiss, current chairman, will participate on the board. John Beeder, the company’s current president and COO, will become CEO.

The deal is expected to close in the second quarter.

“Our management is so impressed with CD&R,” AG spokeswoman Patrice Molnar says. “It was important to the Weiss family to choose an investment partner who shares their commitment to the business.”

Here’s a quick look at how American Greetings came to this point, and what to expect going forward.

From public to private

American Greetings originally went public back in the 1950s. The company was taken private by the Weiss family in 2013 in a deal valued at $878 million.

At the time, the company was generating profits of $50 million to $60 million on sales of about $1.6 billion. The thought was it would enable ownership to make investments in the business and take risks without worrying about how shareholders would react.

Revenue slowly crept its way up to nearly $2 billion in fiscal 2016 and profits expanded to $130 million. But profit plunged 59 percent to $43 million on 8 percent lower sales of $1.4 billion during the first nine months of fiscal 2017, ended Nov. 25, 2016, the latest period for which figures are available, according to Reuters.

IBISWorld’s Lifschutz acknowledges that the greeting card industry has had a rough time of it lately.

“The major players in the greeting cards and related paper products industry are struggling as the lower-cost card segment isn’t performing as well,” she says. “Boutique companies have been cutting into their profits offering higher-end premium greeting cards. Revenue in the greeting cards and related paper products industry in the U.S. has been on a gradual decline and cut nearly in half since its pre-recession levels. Digital alternatives will continue to be the biggest threat and prompt major companies to consolidate and refocus their business strategy.”

Tom Buerkle, associate editor of Reuters Breakingviews, figures the weak numbers mean CD&R got a good price in the deal. “With sales and earnings little changed from four years ago and on a declining trend, it’s unlikely that CD&R shelled out much of a premium, if any, to the price the Weiss family paid four years ago,” Buerkle writes. “That implies a check of around $350 million for the 60 percent stake.”

If the Weiss family didn’t turn a big profit on this sale, their remaining 40 percent stake gives them plenty of upside for another bite at the apple. In fact, CD&R has been involved in a number of major partnership-type investments with family business owners over the years. Perhaps their most notable deal was the 2009 investment of $477 million for a 46 percent stake in JohnsonDiversey, which was controlled by the Johnson family of SC Johnson Wax fame. That deal was part of a $2.6 billion recapitalization of the business, which was sold two years later for $4.3 billion in cash and stock.

Reason for optimism

American Greetings’ products and services are highly regarded by end consumers, suggesting opportunity exists to win new customers and introduce new products. CD&R expects to enhance American Greetings’ operational and financial performance through a combination of capital efficiency, productivity, innovation and growth measures that the company has successfully executed in prior investments.

“Our products always start with the consumer,” Molnar says. “First, we focus on understanding consumers’ underlying need to create meaningful connections and use this as the basis for all of our products. That will not change. So consumers will continue to find American Greetings products at their favorite retailers whether they are walking into a store or ordering from their phones.”

After moving up, AG not moving out

It was less than two years ago that the company moved into American Greetings Creative Studios, a gleaming new headquarters at Crocker Park in Westlake that features state-of-the-art technology and a place for its employees to shop, dine, live and play when they aren’t working. The project brought 1,700 new employees to Westlake, in addition to the 2,400 jobs created in construction, architecture, engineering and finishing work.

The deal with CD&R will not change the company’s future plans as they relate to the Westlake space.

“Our associates love to call this home,” Molnar says. “Our Creative Studios helps attract top talent to the Greater Cleveland area and inspires our associates to do incredible work. This has played a big part in the evolution and continued growth of the business, and we have no intention of moving.”

Legal adviser to AG: Jones Day

Financial adviser to AG: Centerview Partners

Legal adviser to CD&R: Debevoise & Plimpton LLP

Financing: Barclays, Deutsche Bank Securities, Citizens Bank, N.A., ING Capital LLC, Bank of America Merrill Lynch, HSBC Bank USA, N.A., Sumitomo Mitsui Financial Group and KeyBanc Capital Markets

How to reach: American Greetings, www.americangreetings.com