Moody's puts Moore Wallace on review

Moody's Investors Service said it has placed the ratings of Moore Wallace Inc. and its subsidiaries on review for possible upgrade.

These actions follow R.R. Donnelley & Sons Co. and Moore Wallace Inc.'s recent announcement that they have signed a definitive all-stock merger agreement valued at about $2.8 billion that is expected to close in the first quarter of 2004.

The ratings under review include Moore Wallace's senior unsecured notes rated B2, senior secured credit facility rated Ba2, senior implied rating of Ba3 and issuer rating of B1.

The review of both Donnelley and Moore Wallace's debt ratings will focus on the business risks associated with the combined company's strategy to diversify its product offerings by adding Moore Wallace's short-run printing products to its broad array of long-run print products and whether it will enhance the combined company's customer relationships, thereby increasing revenue and expanding operating margins.

The review of Moore Wallace's ratings will also focus on the financial benefits afforded to the company after the merger with the higher rated Donnelley. In addition the review will analyze the terms and conditions by which Moore Wallace's debt obligations will be assumed by Donnelley.

Donnelley and Moore Wallace have signed a definitive merger agreement under which Donnelley will acquire the stock of Moore Wallace in a transaction valued at $3.7 billion including the assumption of about $900 million in existing Moore Wallace debt.

Moody's estimates that the combined company, on a pro forma basis, will have about $1 billion in EBITDA, $200-250 million in free cash flow after dividends and $1.9 billion in debt. With about 1.9x debt to EBITDA and 7.5x debt to free cash flow, Moody's believes these ratios are currently outside of the parameters for Donnelley's current A2 and Prime-1 ratings but superior to Moore Wallace's current Ba3 senior implied rating.

However, management has already earmarked at least $100 million in potential cost savings, the achievability of which will be an important analytical factor in the review process.

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