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Communications Co. Says No Challenge to Acquisition Expected

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According to a letter received by Data Communications Management Corp., the Canadian Competition Bureau is not expected to challenge the company's acquisition of R.R. Donnelly & Sons' Canadian operations.

Printing and marketing services company Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) reported it has received a "no-action letter" from the Canadian Competition Bureau for its acquisition of R.R. Donnelley & Sons' Canadian operations.

The letter confirms that the Commissioner of Competition does not intend to challenge the transaction, which is expected to close this quarter, subject to other customary closing conditions, the company said.

"Combining DCM and RRD Canada will better position our business for sustainable and long-term success serving customers across North America," DCM President and Chief Executive Officer Richard Kellam has said. "We believe the transaction also represents a compelling strategic opportunity for shareholders, as we expect the combined company to benefit from accelerated sales growth, reduced costs, enhanced financial performance, further operational efficiencies, and ultimately value creation."

Last month, DCM reported its revenue had risen by 20% and its gross profit by 33% in the fourth quarter of 2022, as compared to the same quarter in 2021.

"This implies that the pattern will soon resolve into another powerful upleg that could very well be as big as the first upleg," Clive Maund wrote, rating DCM an immediate Strong Speculative Buy.

After that news broke on March 21, DCM's stock went from CA$2 to CA$2.15. Analyst Clive Maund of noted that "after such a big advance, it might be thought that a top is forming, but this pattern has all the attributes of a bull Flag — the persistent heavy volume on the steep advance has been followed by a marked dieback as it has traded sideways, the Accumulation line has held up well, and the trading range can be seen to be tracking within a slightly downsloping parallel trend channel, in other words, a bull Flag."

"This implies that the pattern will soon resolve into another powerful upleg that could very well be as big as the first upleg," he wrote, rating DCM an immediate Strong Speculative Buy.

The stock continued to rise and was CA$2.40 on Tuesday.

The revenue results showed that DCM's EBITDA was up 89.9% for the fourth quarter YoY. For the year ending Dec. 31, 2022, revenue was up 16.3%, gross profit was up 21.1%, and EBITDA was up 45.3% over the year ending Dec. 31, 2021, the company said. For that same period, net income rose by 792.4%.

Companies Are 'A Perfect Fit'

DCM is acquiring RRD's Canadian operations for CA$123 million. RRD Canada provides print and related services to thousands of customers across the country, had a revenue of about CA$250 million in 2022, and has 1,000 employees.

The companies are "a perfect fit," Kellam said. The transaction "combines two companies with complementary operating models and best-in-class products, (and) very strong customer relationships . . . There (are) many meaningful benefits for our clients and for our customers, being bigger and better together and obviously, attractive financial benefits, and value creation opportunities for DCM."

The company's year-end revenues beat estimates made by eResearch analyst Chris Thompson. Along with the acquisition of RRD, that could end up affecting Thompson's future valuation of the company. Both the revenue increase and the acquisition could increase his equal-weighted target price per share.

Acquiring RRD brings in a team that complements DCM's own workforce, Thompson said.

"We believe the deal will be accretive to DCM's financial profile as it accelerates DCM's revenue and EBITDA growth and diversifies its revenue base," wrote Thompson, who maintained a Buy rating on the stock with a one-year price target of CA$4.50.

CA$500 Million in Annual Sales

The new company would have more than CA$500 million in annual sales from day one, an expanded customer base, and an enhanced product portfolio, DCM said.

"Combining our business with DCM is a strategic opportunity to broaden our existing offering to customers across a variety of industries," RRD President Rael Fisher said.

"We believe the deal will be accretive to DCM's financial profile as it accelerates DCM's revenue and EBITDA growth and diversifies its revenue base," wrote Thompson.

Under the share purchase agreement, DCM is acquiring 100% of the shares of Moore Canada Corp. (RRD Canada). DCM is financing 100% of the purchase in cash through "fully committed credit facilities from a Canadian Chartered Bank and Fiera Private Debt," the company has said.

Included in the purchase will be three sites owned by RRD with an implied net value of about CA$30 million. DCM said it intends to enter into a sale and lease-back arrangement for each site.

Streetwise Ownership Overview*

Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX)

*Share Structure as of 3/21/2023

DCM helps companies with branding, communications, and logistics and provides customer loyalty programs, data, and content management, location-specific marketing, labels and asset tracking, multimedia campaign management, and workflow management. Its clients are in many industries, including financial services, health care, emerging markets, retail, non-profits, energy, hospitality, and transportation.

Ownership and Share Structure

Management and insiders own about 45% of DCM, including a share program that gives employees close to 4% ownership.

Top insider shareholders include Director Michael Sifton with 10.2% or 4.5 million shares, Board Vice Chairman Greg Cochrane with 7.43% or 3.28 million shares, Chairman of the Board J.R. Kingsley Ward with 5.54% or 2.44 million shares, and the CEO Kellam with 1.67% or 0.74 million shares, according to Reuters.

According to the company, the rest, 55%, is retail. Reuters lists KST Industries Inc. as the top shareholder in the company overall, with 11.69% or 5.15 million shares.

The company is covered by Noel Atkinson of Clarus Securities and Chris Thompson of eResearch. Newsletter writer Clive Maund also covers the stock. 

It has a market cap of CA$105.75 million with 44 million shares outstanding, with 27.3 million shares free-floating. It trades in the 52-week range of CA$2.45 and CA$1.01.

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1) Steve Sobek wrote this article for Streetwise Reports LLC. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None.

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eResearch Disclosures:

eResearch was established in 2000 as Canada's first equity issuer-sponsored research organization. As a primary source for professional investment research, our Subscribers benefit by having written research on a variety of under-covered companies. We also provide unsponsored research reports on middle and larger-cap companies, using a combination of fundamental and technical analysis. We complement our corporate research coverage with a diversified selection of informative research publications from a wide variety of investment professionals. We provide our professional investment research and analysis directly to our extensive subscriber network of discerning investors, and electronically through our website:

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