Thursday, August 17, 2006

RR Donnelley (RRD) Holder Atlantic Investment Wants a $3B Buyback Versus Takeover

In an amended 13D filing on RR Donnelley & Sons Co. (NYSE: RRD), Atlantic Investment Management disclosed a 5% stake (10.8 million shares). The firm sent a letter to the company, saying it continues its active discussions with management to maximize shareholder value.

In light of recent reports of a bid by one or more private equity groups, the firm underscored the importance of their past proposal to engage in a large share repurchase program

The firm also suggested the $36-$40 per share takeover price would be "unacceptable", saying the company's responsibility is to evaluate all avenues for long term shareholder value enhancement.

The firm revised their proposal from December 2005, which called for a $1 billion share buy back, and now urges the Board to consider a $3 billion share buy back plan.

A Copy of the Letter:

August 17, 2006

Mr. Stephen M. Wolf


R.R. Donnelley & Sons Company

111 South Wacker Drive

Chicago, Illinois 60606

Dear Mr. Wolf:

As you may know, we are one of R.R. Donnelley's (RRD) largest shareholders with over 10.8 million shares and, as such, we share a keen interest with you and RRD's Board of Directors to maximize RRD's shareholder value over the long term.

In light of recent news reports indicating that a bid by one or more private equity groups may be forthcoming, I am writing you to underscore the importance of our December 2005 proposal (please see our 13D filing of January 27, 2006 for details) to engage in a large share repurchase program. Such a program would leverage the value of RRD to the company's current shareholders.

To us, the sell-side suggested potential takeover price (mostly ranging from $36to $40 per share) would be unacceptable, given that you would be handing over the majority of the potential appreciation for RRD's shareholders to a financial buyers group. You have a fiduciary responsibility to all current RRD shareholders to evaluate all avenues for long term shareholder value enhancement. I am sure that this is your and CEO Mark Angelson's focus and intent as well. However, the potential of one or more (presumably) unsolicited bids has accelerated the need for bold and immediate action

Therefore, we hereby revise our proposal from December 2005, which called for a$1 billion share buy back. We now urge the Board of Directors to consider a $3billion share buy back plan, which should be implemented as promptly and cost-effectively as possible. The $3 billion share buy back represents about half the senior debt that a financial buyers group would put on the RRD businesses (we assumed a $40 per share deal with 25% equity, 50% senior debt and25% high yield debt).

Excessive concern over the reaction of debt rating agencies (about which the potential financial buyers of RRD will not be concerned) and maintaining nearly unlimited financial flexibility to make acquisitions will now have to be considered secondary to the importance of doing what is right for all current shareholders of RRD.

We urge you to protect current shareholders from losing most of the upside in their RRD investment to a newly interested financial buyers group, particularly those shareholders who have been patient for the past several years, waiting for an adequate return on their investment. The $3.0 billion buy back plan we are suggesting would retire about 87 million RRD shares (or about 40% of current shares outstanding) and increase EPS in 2007 by an incremental 27% to $3.45.Please see the attachment for details.

At the midpoint of a previously achieved, and well-deserved, P/E multiple in a range of 12-15x, RRD shares might trade above $46 per share in the next year. In addition, we believe that the post buy back level of debt will still allow the company to maintain solid credit ratings and have sufficient financial flexibility for accretive add-on acquisitions.

I trust that you and the Board of Directors will make the right decision for shareholders at this crucial juncture in RRD's history.


Alexander J. Roepers



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