ACCC troubles PMP

The ACCC released a Statement of Issues relating to PMP's proposed merger with IMPG, it's largest competitor, and hinted it may not allow the deal to occur.

The ACCC argues that the heatset print market would face reduced competition. That is unquestionably true.

PMP and IMPG together control about three quarters of the heatset market but there are far more options for printing than heatset alone and we're surprised by the narrow definition used to measure competition. If taken more broadly, the combined group would have a tiny market share of the print market. 

Yet today's announcement makes clear that the ACCC is unlikely to allow the merger unless it can be convinced otherwise. It now falls to PMP and IMPG to make the case for the deal. We think there is a strong case to make.

The woeful margins and miserly returns from the entire sector suggest that heatset printing faces ample competition, in particular from digital printing. Without the merger and the capacity cuts it will allow, the viability of the sector is in question.

There is also the small point that PMP's largest customers are huge oligopolists that enjoy uncurtailed market and bargaining power.

With today's price fall there is substantial value on the table. We think the merged group would be worth more than $1 a share and PMP's value alone is about 70cps. Yet we would only buy at a discount to that price.

Disappointingly, it is prudent to lower the buy price to 60c and wait for a verdict. With a bulletproof balance sheet and strong free cash flows, the downside from here is low but the upside will only be realised if the ACCC relents. The odds of that have fallen. HOLD.

Note: The Intelligent Investor Equity Income portfolio owns shares in PMP. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in PMP.