A major announcement impacting Ovato released this afternoon with the company announcing a rights issue to be backed by mercury Capital, owners of Are media (formerly Bauer).
Click here for the creditors’ scheme of arrangement document as lodged with the ASX.
This line from the release release is telling: The plan would provide a viable future for Ovato and prevent possible insolvency.
Ovato announces plans for $40 million rights issue and restructure
Ovato Limited, one of Australia’s largest print and distribution businesses, today announced a plan for a $40 million rights issue and restructure aimed at saving 900 jobs in the Australian manufacturing industry.
The plan would provide a viable future for Ovato and prevent possible insolvency. The plan includes 300 redundancies primarily through the closure of the Clayton printing plant in Melbourne.
The majority Ovato shareholder, the Hannan family, and a Mercury Capital entity Are Media Pty Limited have agreed to underwrite $35 million of the rights issue.
The Scheme is subject to completion of the rights issue and approval by creditors and the Supreme Court of NSW.
The Managing Director of Ovato, Mr Kevin Slaven, said:
“Print-based industries have been significantly affected in recent years and the COVID-19 pandemic has increased the pain this year for many parts of our group.
“Our industry has gone about as far as it can with mergers and consolidations in the last five years. Ovato has suffered losses for several years because of the costs of measures to meet the reduced demand for printed communications. This restructure allows for the company to get back to profitability and a sustainable future.
“Unfortunately, it means that over 300 employees will lose their jobs. However, the restructure will save 900 other jobs because the company would be facing an uncertain future without the restructure we are proposing.
“The proposed new equity, underwritten by two significant players in the printing and media sectors, together with the indicative support of our major suppliers and financiers to restructure our balance sheet, provides the foundation for a viable, sustainable and exciting future for our Group.
“Critical to the implementation of the Scheme, there will be no impact on our customers or all other suppliers outside of the Scheme, other than the positive impact of providing the Company with a stronger balance sheet and a viable, sustainable future. Our view, and the view of the independent expert, is that without this Scheme, the outlook for the whole group is unpalatable. We have searched for alternative solutions to the massive disruption in our industry, but they were unworkable.
“The Scheme will reduce our cost base, make us more sustainable and provide customers, suppliers and the 900 remaining staff certainty around a viable and profitable future.”
Ovato, which operates in Australia and New Zealand with print, distribution and marketing services. Ovato made a net loss after tax of $108.8 million last financial year, on revenue of $539.3 million. Creditors will meet on 30 November. All Ovato businesses outside of the Australian print operations are unaffected by the restructure.
UPDATE: November 13, 2020:
My view is that we need to consider what is happening with Ovato in the context of my recent post: What if the most important stream of revenue for your business was cut off overnight?. Okay, this may not be overnight, and it relies on a truckload of assumption … but what if Mercury get into a position of significant influence over Ovato? What if they saw a brighter future for top selling magazines through Australia Post, Supermarkets and Convenience, with newsagents way down the line?
I know the folks at Ovato will say that is hot a consideration. I accept that in their offices it would not be a consideration. But, what if Mercury gained a position of influence. It is what Mercury wants that would matter more.
Ovato is two main businesses print and distribution. I suspect that given the pivot of supermarkets and mass retail away from catalogues and flyers the print business is challenges. I suspect the magazine distribution part of distribution is doing well. However, that business is currently tied to the print business.
While I am no accountant or business strategy expert, what if the magazine distribution part of the business was spun out of a Mercury influenced Ovato, what would that look like for Mercury, their Are media business and for magazine distribution.
This is all speculation.
I have read a chunk of the Project Walker document. While it is considerable, 624 pages, it does not address how this may ultimately play out. It certainly speaks to the immediate need. Does it speak to what actually matters to us.
Ovato has a cash challenge brought on by decay within its core businesses and accelerated by Covid. In the print part of the business especially it appears the company did not have a solid plan b in the event of the lost of an important revenue stream.
What was lodged with the ASX yesterday represents an early step. The next few weeks will be interesting for all involved with the business.
From a newsagent perspective, I am keen to hear what Mercury Capital has to say, in particular about the future of the magazine distribution side of the Ovato business. Had Are media not pursured the Australia Post trial I would be less concerned.