Clover Imaging Group (Clover) has been in the news quite a bit in recent months, and not for the best of reasons. In July, the imaging supplies remanufacturer’s parent company, 4L Technologies, cut its earnings forecast for the current fiscal year significantly (to the tune of 40%-50%) after losing business from two major clients. One of those clients is reportedly AT&T, while the other is an unnamed Clover Imaging Group customer (we think its Xerox). The news kicked off the beginning of a snowball effect for Clover, pushing the company (amid swirling rumors of terminal debt and a pending sale) to send a letter to its customers reassuring them that everything is just fine. But is it really fine? The answer to that question is yet to be known and could be revealed in the near future. Let’s take a look back at how Clover got to its current predicament, and explore some possible scenarios for the company’s future.

Clover Imaging Group Logo

The Beginning

Clover (then Clover Technologies Group) established its roots as a toner remanufacturer in 1996 in Marseilles, Illinois. From 2005 through 2015, Clover acquired a number of US-based remanufacturing and distribution companies, including Dataproducts, Depot America, American Communications, and MSE, to name a few. In the middle of that 10-year span, private equity firm Golden Gate Capital became a major stakeholder of the company while simultaneously acquiring West Point Products. Also during that period, Clover went from $1.2 million to over $1 billion in annual revenue — increasing sales by more than 830% over a period of 10 years. By the end of 2015, Clover had a mobile device solutions platform as well as a telecommunications and hardware engineering business, and its booming supplies remanufacturing business became Clover Imaging Group (CIG).

Clover Ink and Toner Image

From the outside looking in, business was good for Clover. The company’s supplies remanufacturing business had become the largest in North America, with Latin American, South American, and Canadian divisions. The company expanded operations with branches in Europe and Australia as well. CIG had grown to include managed print services (MPS) partnerships, a force that propelled the company’s channel penetration, becoming a core part of many dealers’ growth strategies. All signs were pointing up. So what happened?

The Middle

While Clover was busy snapping up smaller US remanufacturing companies and expanding its partnerships with dealers, a storm was quietly brewing in the print industry. The Chinese new-build toner manufacturing business was on the rise, fueled by low production costs and R&D advancements that improved product quality to levels that were previously unattainable. In 2015, Apex (now Ninestar) acquired its major chip competitor, Static Control Components, for around $60 million. The following year, Apex led a consortium of investors in purchasing Lexmark’s laser printing business for $3.6 billion cash.

Meanwhile, overall demand for print has been in a state of decline as the shift toward digital platforms increases. Steadily decreasing revenues and page volumes have impacted virtually all OEMs still standing, while many others have folded into acquisitions by larger players. HP, which acquired Samsung’s printing business in 2017, made headlines again this year when it announced an expanded partnership with Xerox. The move undoubtedly ruffled feathers at Fujifilm (the parent company of Xerox’s OEM engine supplier Fuji Xerox), which has had a troubled relationship with Xerox since outspoken shareholder Carl Icahn led the charge in blocking a merger between the two companies in 2018. As part of the new deal, Xerox will supply HP with toner (a move that Canon, HP’s laser-based OEM partner, is likely not thrilled about either) and in turn, Xerox will sell Xerox-branded printers that source HP-owned Samsung engine technology. The exact details of the toner-side of the agreement remain unconfirmed, but HP has reportedly stipulated that Xerox can no longer sell remanufactured HP laser supplies under its XRC line (The same fate has hurt competing remanufacturer LMI Solutions, whose primary lender recently filed for receivership of the company). Insert Clover’s recent news of losing the business of two major clients, one of which did business with CIG, and the puzzle pieces start to come together.

Xerox XRC HP Toner Cartridge

To add insult to injury, HP has been aggressively working to win back customers who have switched to Clover supplies for their MPS business. Clover launched its own counter-campaign this year called Silver Bullet, offering dealers a 30% discount on supplies for HP accounts that convert to Clover remanufactured toner. There’s no doubt that the aggressive discounting and increased marketing cuts into Clover’s profits, while also demonstrating how eager the company is to win those accounts.

CIG Sucess of Silver Bullet Program tweet

As companies struggle to hold onto their piece of the ever-shrinking and consolidating print industry pie, Clover’s fate seems suddenly uncertain. The value of 4L Technologies’ $650 million in debt took a dive following its earnings forecast update, leading Moody’s Investors Service to declare that the company is at high risk of defaulting. Just this week, The Wall Street Journal’s Pro Bankruptcy publication reported that Bank of America resigned as Clover’s loan agent, feeding the rumors that the company could default on its debt. Could this be the beginning of the end for Clover?

The End?

While things may appear to be spiraling for Clover, it might not be as bad as it looks. The company is actively seeking solutions to restructure its existing debt, although George Milton, CIG’s CEO, and President Eric Martin, have both been rather tight-lipped in providing specifics on any potential transactions to come. The two executives sent a letter to CIG’s customers in an effort to quell the mounting rumors of financial unrest (that letter was reprinted by Industry Analysts and can be read here). The letter claimed that things at CIG are “business as usual” and went on to tout Clover’s status as the world’s largest collector and remanufacturer of printer cartridges. More revealing, perhaps, is what the letter did not address. There was no mention of Clover’s downgraded debt status or of the financial consulting firm hired to advise the company on how to proceed.

Contrary to the executives’ statement, it does not seem as though things are “business as usual” for Clover. The company’s major stakeholder, Golden Gate Capital, recently filed paperwork  indicating that it is preparing to sell one of its holdings. In a recent interview with The Imaging Channel , Clover admitted that OEMs and remanufacturers alike face an uphill battle against Chinese clone manufacturers. Nonetheless, Clover remains unwilling to provide meaningful details on any potential changes to the company’s ownership or structure. While we can’t say for sure, there are a few scenarios that are likely to play out over the next several months:

  • Clover defaults and goes out of business – Unlikely. The company is basically “too big to fail” at this point, and some entity will find value in the infrastructure they’ve built in North America (and globally).
  • Clover is acquired by an OEM – Pretty unlikely. This would certainly be an interesting plot twist, although it seems a little too contradictory for the time being.
  • Clover is acquired by a Chinese new-build manufacturer – Pretty unlikely, still. The clone companies might not risk the high investment in a remanufacturing operation based in the US when profitability is already uncertain AND the ongoing trade negotiations between the US and China may make that arrangement more challenging if tariffs increase.
  • Another private equity firm invests in Clover and the company restructures its debt – Likely. All possibilities considered, it’s probable that another firm will be willing to take a chance on the troubled remanufacturer. After all, the company reported that it holds about $136 million in cash and expects to net between $87 million and $96 million this year, despite its woes.

Clover’s current financial status is uncertain at best and rocky to say the least. The company has some serious soul-searching to do in order to find solutions to its longer-term problems of industry consolidation and declining demand. That said, CIG will likely continue to fight the good fight and work to maintain a profitable business for the near term. How that will play out, however, is yet to be seen. My guess is that we’ll hear something, good or bad, by the end of 2019.

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