London-based Quarto said that following a solid gain in earnings in 2003 and based on the advice of investment banker Lazard & Co., it has decided to discontinue discussions with third parties interested in acquiring it. Quarto has been examining merger opportunities ever since JO Hambro Capital made an unsolicited offer for the company last summer. The company's new strategy, said chairman Laurence Orbach, will be to grow "through significant acquisitions and organic growth." Orbach said it is possible that Quarto could double in size over the next few years.
An acquisition could come in any one of Quarto's markets, including the U.S., which accounted for 56% of the company's 2003 revenue of £74.6 million ($121.6 million). Because of currency fluctuations, sales were flat last year, although when measured in local currency, sales were up 6%. Pretax profits increased 12.2%, to £5.7 million.
Sales in its international co-edition publishing division rose 9%, to £45.4 million, and operating profit increased 21%, to £5.5 million. In the publishing division, which operates mainly in the U.S., sales fell 11.2%, to £29.2 million and operating profit dropped 23%, to £2.2 million. Quarto attributed the decline in the publishing division to a small decline in U.S. sales plus the loss of a major client in the U.K. The gains in the co-edition division were due to a combination of good frontlist (1001 Movies You Must See Before You Die), and backlist (500 Low Carb Recipes) sales. New imprints Qu:id and Eye also contributed to the increase led by Eye's Household Management for Men, which now has more than 100,000 copies in print worldwide. The company also noted that its art publishing operations "improved marginally" in the year, and its U.S. Book Sales division improved in local currency terms.
In a long letter to shareholders, Orbach explained the rationale for growing through acquisition. He said that while Quarto has been successful in launching new ventures, it often takes time before they make a meaningful impact on results. (An exception has been the U.S. imprint Fair Winds, which had sales of £3.6 million in 2003, three years after its launch.) The optimal size of a new unit is £7 million to £8 million, Orbach said, noting that an operation in that range can be run with lean management and be creatively vital.
