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Ovato rights issue backed by Mercury Capital

Mark Fletcher
November 12th, 2020 · 14 Comments

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.

6 likes

Category: magazines

14 responses so far ↓

  • 1 Colin // Nov 12, 2020 at 6:16 PM

    So Mercury, owner of Bauer and Pacific, backs Ovato, who print and distribute those mags and others.

    Smells like a monopoly.

    2 likes

  • 2 Steve // Nov 12, 2020 at 8:27 PM

    Well let’s hope for all our sake that the proposed schemes are accepted. The alternative is bleak and will spell trouble for us all. Colin hopefully if the schemes proceed those of us currently at the mercy of News Corp for the delivery of our magazines will see some improvement though I share your fear that they may both have the same digital growth strategy.

    3 likes

  • 3 Mark Fletcher // Nov 13, 2020 at 6:52 AM

    I have added more thoughts on this news this morning.

    1 likes

  • 4 Steve // Nov 13, 2020 at 8:36 AM

    I agree Mark the long term plays of both the venture capitalists and Australia Post is intriguing. For Ovato and Hannan the creditors scheme appears to be their only choice. Hannan appears to be still in the game and betting “double or nothing”. Lets not forget the creditors being asked to take a bath on their outstanding debts and the 300 employees who will be made redundant.

    0 likes

  • 5 Mark Fletcher // Nov 13, 2020 at 9:26 AM

    Steve, regardless of how this plays out for Ovato, it reinforces a position re magazines that newsagents need to comprehend today and not months or years down the track, when it may be too late to strengthen the traffic foundation of the business.

    0 likes

  • 6 Graeme Day // Nov 13, 2020 at 11:42 AM

    Mark, Iagree It may well be the time to reorganise a new business model as this one isn’t working. Perhaps firm sale at a better margin might make all take notice of Retail ans not service as an industry.
    Let’s get real and have product that pays for space plus profit. Say 50 percent Gross Profit margin would be a good beginning.

    0 likes

  • 7 Jeff // Nov 13, 2020 at 1:16 PM

    I pulled out my old magazine gondola a year ago and have not looked back. I have about 600 magazine titles in the shop but I don’t rely on them like I used to.

    1 likes

  • 8 David // Nov 14, 2020 at 7:28 AM

    We all knew magazines were in decline. 2020 has amped that up. With print close to dead, it’s hard to see who would invest.

    0 likes

  • 9 eddy // Nov 14, 2020 at 11:38 AM

    Why is it with some newsagents that they get on here and say don’t rely on this and that in their shop and you just wonder if they have anything in the shop worth selling.
    I own shares in Ovarto sales of 500 mill in sales thats 10 mill a week from ink and paper not bad. in an average newsagency mag sales would be around $3000/week not a bad little earner either.

    0 likes

  • 10 Mark Fletcher // Nov 14, 2020 at 11:48 AM

    Eddy I think you misunderstand. There is a difference between not having a category and not relying on it.

    Take magazines, not that long ago, magazines would account for around 25% of physical product turnover in a newsagency. Today, in a well-run future-focussed newsagency, that percentage would be under 10%.

    That is what not relying on magazines looks like.

    The average newsagent sells less than $3,000 in magazines a week. But, let’s take your number. The $3,000 offers a GP of $750.00. If magazines take, say, 20% of floor space, there is the space cost. Then, there is the labour cost. On average, $3,000 of magazines would cost between 7 and 10 man-hours a week specific to that category. So, labour would be $125.00 and space, depending on location, around $500.00 (I am being generous).

    That leaves $125.00 to fund labour cost in selling, shrinkage, the cost of funds for inventory and profit.

    At $3,000 a week, on the paltry margin of 25%, magazines are not a nice little earner.

    Look at Gifts. I saw data yesterday for a newsagency doing around $3,000 a week in magazines and $5,000 a week in gifts. The $2,500.00 GP contribution from gifts is more valuable to that business than the magazine contribution of $750.00.

    What to others have in their shops worth selling? games, toys, gifts, collectibles – all net new traffic generators.

    I am not here telling you or anyone what to do. Sure, I make suggestions. But, Eddy, it’s 100% your business to manage and grow.

    3 likes

  • 11 Steve // Nov 14, 2020 at 1:42 PM

    Eddy we still sell over $4k per week in magazines and I am one of the lucky few who experienced some growth in magazine sales over the last 12 months though modest that growth was. Of course magazine sales remains important to my business and for us probably more so than others as we are not a big lotteries store. Having said that our focus remains on growing our non traditional lines namely gifts, toys and books. We are currently growing at $2,000 per week year on year in these 3 categories each with significantly higher margins than magazines thereby limiting our exposure to that category should the world cave in. Launching our new online store remains our next goal to limit our exposure. In any event I truly hope the Ovato schemes of arrangements proceed as yes magazines are still important to us.

    1 likes

  • 12 PJ // Nov 14, 2020 at 2:17 PM

    Last time I looked Mercury had printing in NZ so this move will probably be towards securing Ovato print business after they clean it up with restructuring. With Are they then have cost savings doing their own printing and leaving Ovato simply do distribution, which admittedly they are good at most of the time. Market Hub is growing (another thing hurting GNS) and Ovato is best to focus on 3PL.

    1 likes

  • 13 Colin // Nov 15, 2020 at 10:11 AM

    The more you look at Ovato the greater the smell.

    2 rights issues in 18 months blowing $50m

    $240m of losses in last 3 years

    Enterprise agreement terminated with avoidance of redundancy costs

    Print revenues down 40% year on year

    50% haircut for suppliers.

    $25m of jobseeker spent elsewhere

    This rights issue is not a recovery plan, it promises one, but it is the same plan Hannah has been touting at each stage of restructuring.

    Meanwhile, Ovato’s major competitor in leaflets continues to pay its way.

    This rights issue appears to one benefit in that it enables Mercury to manage its magazine divisions through tumultuous change. Everyone else is totally secondary.

    It will be interesting to see the High Court take on it. Receivers and break up looks like a better option.

    As with Virgin, there comes a point where standing up to mega rich owners looking for bailouts reaps political rewards. I don’t think this is necessarily a done deal.

    0 likes

  • 14 Graeme Day // Nov 16, 2020 at 2:16 PM

    I agree Colin it is more of the same.A new business model is required to suit today’s retail and on line combination.

    0 likes

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