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Clover – What next?

November 17, 2017

What is next for Clover, following Moody’s recent downgrade of parent company 4L Technologies Inc.

Clover is the remanufacturing industries boy done good story as it grew from a small business to be the corporate giant that it is today. Operating from over seventy sites worldwide collecting, remanufacturing and distributing laser and inkjet consumables, wireless devices and telecommunications equipment to a mainly United States customer base of office products retailers and wireless carriers.

In 2014 The Recycler reported that Clover was on target to hit the $1.1 billion (€0.93 billion) of sales, but since then sales and profits have contracted year on year and first half results for 2017 were down eight percent on the same period in 2016.  In October Moody’s Investors Service downgraded Clovers parent company 4L Technologies Inc., citing “uncertainties related to the timing of stabilization in 4L Tech’s business after a multi-year contraction in sales and profitability.” 4L Technologies is majority owned by Golden Gate Private Equity, Inc.

Two weeks after the Moody’s downgrade Clover announced that the CEO Jim Cerkleski, would become Chairman of the Board of Directors and that George Milton has been appointed the new CEO and he commented “we have a tremendous platform which has been established by our dedicated employees. I am excited to continue building on our strong market position and global manufacturing and distribution footprint, and look forward to the opportunities ahead. As a priority, I will ensure that we continue our focus on providing quality and value, as well as supporting the new business strategies of our customers.”

What are the challenges facing clover’s new CEO?  Firstly, the market for imaging products has contracted, and Clover has no real end-user engagement and relies on an ailing US-centric office product retailing channel. The OEM’s have reacted differently to the contracting market and are driving MPS sales up and at the same time using “Instant Ink” type programmes to drive end-user revenues, and this could see Clover lose key customer contracts to OEM’s and other competitors.  In Europe, the market is also contracting, but the MSE sales channel has been dismantled and there appears to be no cohesive strategy to drive sales, and their market is under threat from more agile competitors who want to increase their share of the European office products market for remanufactured laser and inkjet consumables.

Manufacturing and refurbishing operations are being centred on clovers Vietnam and Mexico facilities, but the company is spread across another sixty-eight locations around the world handling collections, sales and distribution. While the headcount continues to fall, restructuring the business for the current and future market is slow and akin to a supertanker changing direction. It doesn’t happen quickly.

The big challenge facing the new Clover CEO is the level of debt carried by the company which is currently in the order of $700 million (€593 million) with a revolving credit facility due for renewal in 2019 and a secured loan due in 2020 and $66 million (€55.92 million) of cash in the bank.

Clover needs to generate more free cash to service the debt, and this can come from getting closer to the end-user consumer base where they can benefit from increased prices and profitability. But they will also need to significantly reduce their global operating costs.

In August 2016, The Recycler reported a Reuters report that Clover’s major shareholder, Golden Gate Private Equity had appointed investment bank Morgan Stanley to help run an auction for the company, the price tag was $1.5 billion (€1.27 billion). According to a person familiar with the discussions, Clover’s senior executives had met in the summer of 2016 to discuss the possibility of a sale of Clover or a Golden Gate exit. At the time the then CEO Jim Cerkleski hotly denied the sale rumour, but today it is possible that a sale of Clovers telecommunications equipment business could generate funds and boost debt repayments.

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