Glen Bradford
DAC Group Yellow Pages Usage Increasing in Many Categories
http://blog.dacgroup.com/yellow-pages-usage-increasing-in-many-categories
Yellow Pages Usage Increasing in Many Categories
rfrantz – Friday, May 11, 2012
When talking about Print Yellow Pages (PYP) usage, many are quick to quote the decreasing trend in overall PYP references. However, looking at an overall figure is not the end of the story. Print directories are extremely effective in many categories, and when looking at the 2011 DAC Group/Kantar data, we can see that various headings actually show year over year increases in consumer PYP usage.
While analyzing 2010-2011 trending results of the DAC Group/Kantar proprietary study, one can see that responses indicated an overall 10% decrease in utilization of PYP. However, looking closer at the category-specific data, the study found notable increases in PYP usage in 14 out of 29 Canadian categories including headings such as: Airlines, Banks, Insurance, Hotels and Motels, Pharmacies, and Tires. In fact, Canadian respondents rated PYP as their number one source when looking for business information for the heading categories of Auto Repair, Electrical Contractors, Pizza, and Plumbers.
According to a recent news article examining PYP usage in the modern age, a common reason for consumers’ continued use of print books in the era of quick Internet searches and Smartphones is simply that not every business is easily searchable online. While many small businesses make an effort to increase their online presence, there will always be some companies that are difficult to find on the Internet. In addition, inconsistency of companies’ online listings can make businesses difficult to contact. If consumers can’t find a business on the Internet, they will often turn to the reliability of print directories.
Despite the explosion of internet search, there is still room for growth in PYP usage. Consumers are increasingly searching using multiple media sources, and it is important to be present wherever consumers are looking. While PYP is not the top media choice for every consumer, it is a primary business information source for many shoppers and ignoring this consumer segment could be a costly misstep for small businesses across many categories.
Rebecca Frantz, Marketing Research Assistant
Dac Group – Think Twice Before Dropping Directory Ads
http://blog.dacgroup.com/think-twice-before-dropping-directory-ads
Think Twice Before Dropping Directory Ads
Sscopa – Tuesday, May 8, 2012
Even in these recessionary times, advertisers who maintained their directory ad programs experienced an increase in calls, profit and return on investment. A recentPatek analytics study looked at directory ads published between 2008-2011, comprised of 1572 ad programs, spanning 86 headings. This study provides more evidence that directory ads continue to provide outstanding value for advertisers. The increases cited varied by market and by category. Smaller markets (population of 500,000 or lower) averaged 20% growth and larger markets with populations over 500,000 experienced slightly less than 20% growth. (click on images to enlarge)
The tables below demonstrate this consistent growth. Even if these directory headings have fewer ads, the remaining advertisers have the opportunity to increase their reach over competitors not in the directory.
Although results varied by category, you will see from the charts below that the median trend growth in calls are significant both in large and small markets. These statistics should make you think twice about dropping directory ads—especially if you are in the home service or emergency repair categories.
There has been much said about the health of the directory business. There has been a proliferation of media choices with smartphones now being used by 50% of the population. Online search engines continue to dominate consumers’ research patterns, which has undoubtedly made an impact on print book usage. The recession has also had an impact. No one could have predicted the severe recession that left U.S. consumers scared and afraid to spend. This had a major impact on businesses. Still as the economy turns around, even though digital media continues to be strong, there is no doubt that there remains a strong core of directory users who continue to search for local businesses using this medium and as consumer confidence increases, directories will continue to be strong in relevant categories. Think twice about dropping your directory ads. You may be missing out on a segment of valuable consumers.
YLO – Edward Vranic – SeekingAlpha
AT&T’S Yellow Pages Q1 Performance Increases Floor On Value Of Canadian Company For Potential Buyout
With Yellow Media (YLWPF.PK) (TSX:YLO) and AT&T (T) releasing their Q1 results, I thought it would be appropriate to update my comparison of Yellow Media to AT&T’s Advertising Solutions division which a majority stake was sold to Cerberus in early April. Referring to the chart below:
(click to enlarge)
The first thing that sticks out when looking at the AT&T numbers is the huge decline in EBITDA and margin. While the revenue decline appears to be slowing down, EBITDA declined an outstanding 33% with margin declining from 34% in Q1 2011 to 26.5% in Q1 2012. When the Cerberus deal took place in April, the company very likely had a preview of these numbers. This is where the big myth comes in that Cerberus paid merely 1.74x EBITDA for 53% of the division. It paid 1.74x 2011 EBITDA for a business, which it knew had a 33% decline in EBITDA in Q1 2012 and thin margins that are getting thinner by the quarter. YP Holdings LLC is a business in distress, where Cerberus will attempt to extract value by turning it around.
Contrast that to Yellow Media. The company took a nearly $3 billion hit to goodwill in Q1, with one of the reasons being the Cerberus deal, which valued the AT&T business at a supposedly low metric. While the industries are the same, the two companies are in completely different situations. Yellow Media’s business is scaling down but it is not in distress. Looking at Q1 2012 numbers, the revenue decline is 17% (13% from continuing operations) and EBITDA decline is 23% (21% from continuing operations) when comparing with Q1 2011. Bad, but not nearly as bad as AT&T’s division. The most telling aspect of the business transformation to digital is the EBITDA margin. It came in at 50.5%, which is down 4% from Q1 2011 but essentially flat when averaging it against the last three quarters. An argument could be made that Q1 is seasonally the strongest based on the above chart. The counter-argument to that is every quarter has seen a decline in Yellow Pages businesses so by default Q1 would appear to be the strongest. The point is that as Yellow Media transforms to more and more of a digital company every quarter, it has managed to maintain its margin over the last four quarters, which the AT&T business has failed to do. Even when assuming that Q1 has the seasonally strongest margin that would imply a respectable 46-47% margin for Yellow Media for the full year.
Referring to the last line in the chart tells you another very interesting story. Yellow Media’s EBITDA as a percentage of YP Holding’s EBITDA shows a very clear year-over-year trend. In 2010 Yellow Media averaged about 56% of YP’s EBITDA. In 2011 that ratio spiked to 66% and now in Q1 2012 it spiked again to 74%. Since Q1 has a history of being about 2-3% lower than the full-year ratio, it’s reasonable to expect to it be 76% for the full year. If we assume the Cerberus effective valuation of the AT&T business of $1.8 billion to be based on what it knew for 2012 as opposed to 2011 numbers, it would be reasonable to say that Yellow Media’s business would have a floor at 76% of that number, or $1.36 billion.
Yellow Media has become the pariah of the Toronto Stock Exchange but from a business perspective its metrics are reflective of the Canadian business climate at large rather than being in a so-called dying industry. For instance, its average revenue per client on a yearly basis was $3,367 in Q1 2012 vs. $3,444 in Q1 2011, down 2.2%. Contrast that to Rogers (RCI), the largest Canadian wireless communications company, which saw average revenue per client (on a monthly basis) drop from $59.91 to $57.65 from Q1 2011 to Q1 2012, a 3.8% decline. Or compare Yellow Media’s margin to Loblaw Companies, the leading Canadian supermarket chain, which saw its ever so thin EBITDA margin drop from 6.6% in Q1 2011 to 5.9% in Q1 2012. Despite the increase in revenue, Loblaw’s EBITDA shrank 10% from $455M to $409M.
Plenty of Canadian companies have margin and revenue pressures associated with greater competition. Yet their enterprise value isn’t getting hacked to death like Yellow Media’s. The company has a problem with capital structure. The transition from a print business to one online is in a de-scaling phase until online revenue overtakes print in importance, but the business itself is far from unprofitable. Loblaw has an enterprise value of around $15 billion vs. Yellow Media’s of about $1 billion when you consider the market prices of all debt and equity securities. Hardly seems fair to value Loblaw securities 15 times greater than Yellow Media’s when both have shrinking EBITDAs and Yellow Media achieves over a third of Loblaw’s EBITDA. While the argument can be made that Loblaw has a lot of hard assets, it’s the return on those assets that matter the most unless you are liquidating the company.
This is where the value proposition for the equity comes in. Bondholders have publicly declared that they wouldn’t object to taking an equity stake in the company in lieu of the debt repayment but have no official say in the issue until at least one year from now when Yellow Media could possibly default on repayment of the 2013 bonds, but most likely the issue cannot be forced until 2014. The danger associated with waiting that long is employees who see the state of the company and see their stock purchase plans deeply in the red will become demoralized or leave, thus hurting the business’ value. Bondholders will “pay” shareholders in order to assume control of the company as soon as possible. That payment could be in the form of a restructuring where shareholders get a minority stake in the new company, or it could come in the form of a buyout of shares by a private entity acting on the interests of the bondholders. How much could shareholders get? It’s dependent upon the negotiation skills of Yellow Media management but my previous article suggested that Yellow Media’s enterprise value should be around $1.8B, leaving around $300M for equity. With the Q1 financials for Yellow Media and YP Holdings being released, the Cerberus deal can be seen in a whole new light, which increases the floor for the enterprise value on Yellow Media.
Disclosure: I am long YLWPF.PK.
Yellow – Comparison
http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=31044576&l=0&r=0&s=YLO&t=LIST
For those trying to seek a comparison:
http://en.wikipedia.org/wiki/CanWest_Global
$4billion in total debt
$197M in yearly EBITDA in 2009 (vs $428M in 2008)
CCAA in October 2009
Stock traded until Oct 2010, ended at 5 cents per share. Hit as low as 4 cents in Oct 2009 during CCAA. Twice hit nearly 20 cents during the year. Spiked to nearly 30 cents from low teens shortly before announcing CCAA.
Old shareholders got 2.3% of the company
All this was going on during the height of the credit crisis when bank money wasn’t exactly free flowing.
Review their 3 year chart:
http://www.bloomberg.com/quote/CGS:CN/chart
So after all this, considering that their EBITDA dropped faster, was much less, debt was over twice as much and they went through CCAA proceedings, old shareholders STILL ended up with 2.3% of the company. After announcing CCAA the company twice hit nearly 20 cents and closed up shop at 5 cents per share.
Conclusion – the YLO story is FAR from over no matter how bleak it appears to be at the moment. Negotiations have already started 1-2 years prior to any possible court ordered CCAA. Does that sound like the action of a company that will get less than 2.3% of a restructured YLO’s equity?
ylo some reasonable analysis
Agreed with this. Tellier claimed that 82% of clients are in a steady state or increasing. The 18% that takes up 40% of revenue are the guys at risk. Even if this were to go to zero, with zero growth in online and zero growth in the other 82%, 60% of $1,329 in revenue is about $800M. Let’s say EBITDA margin declines to 40%, that would be $320M a year, the absolute, positive floor.
Reasonable analysis below:
http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=31036861&l=0&r=0&s=YLO&t=LIST
Fair market value = 2.5 x EBITDA annually, however, not sure where you get $200 million for annualized EBITDA. The quarterly EBITDA this quarter alone is $146 million.
You can look at four cases, on opposite ends of the spectrum to understand fair value assessment using the 2.5 EBITDA multiplier…
Best case: If EBITDA stayed the same all year (unlikely) then 2.5*4*146 = 1.46 B fair value.
If EBITDA declines linearly by 25% over the year, then you`re looking at a mean quartery EBITDA of 128Million. In this case, Fair value = 2.5 x 4 x 128 = 1.28 B.
If EBITDA declines linearly by 50% over the year, then mean quartery EBITDA is 109.5 Million and fair value is at 1.1 Billion or so.
Worst reasonable case: Finally, if print revenue drops to zero and online does not change, then with a linear 70% EBITDA drop (since online equals 30% right now and margin is similar to print), mean quarterly EBITDA would be 95.5 million and fair value would be 955 million.
http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=31036847&l=0&r=0&s=YLO&t=LIST
AT&T’s YPG Q1 EBITDA was $197M. YLO’s was $146M. Since the Cerberus deal occured in April, I’m pretty sure they had a pretty clear look into Q1 so they took that into account when making a deal. $146M/$197M is 74.1%. Valuing the AT&T business at $1,792M, 74.1% of that is $1,328M, a far cry higher than stockbagger’s BS version.
Also, a strong case can be made that the YLO business should be valued much higher than the AT&T one. YLO’s EBITDA dropped 23% on over 50% EBITDA margin quarter over quarter. YPG’s dropped 33% on 26.5% EBITDA margin. AT&T’s business is toxic and got purchased. Their EBITDA margin declined an additional 2% from Q4. There’s nothing wrong with YLO’s business other than the fact that it’s scaling down, it’s only the capital structure that’s messed up. YLO’s EBITDA margin rose from Q4 3.5%. I know that comparing Q4 to Q1 is supposedly not apt thanks to seasonality, but in this case it is since online revenues as a % of total are higher than ever and it shows that the supposed decline in profitability once the business transforms is greatly overexaggerated.
Tellier is an absolute goof to use the YPG business as an excuse to draw down the goodwill. Will either a goof or a snake to make a restructure deal look more plausible. Maybe it’s option #2.
YLO – People are figuring it out
Yellow Media takes $2.9B charge, cancels AGM
http://www.bnn.ca/News/2012/5/8/Yellow-Media-takes-charge-cancels-AGM.aspx
Things just got worse at Yellow Media Inc., (YLO-T 0.07 -0.04 -35.00%) with the company’s executives warning investors that digital ads aren’t making up for the losses piling up in its printed phonebooks division.
With its share price near zero and bond holders thinking out loud about what it might take to privatize the company to recoup at least some of their investments, Yellow Media said late Monday that the business is worth far less than they believed only a few months ago as it recorded a $2.9-billion impairment charge.
“During the quarter, we noted changes in our revenue trends affecting our long-term projections,” the company said in regulatory filings released late Monday. “Specifically, we now believe online revenue growth will be slower than previously anticipated and print decline will be steeper based on a more rapid and enduring change than previously anticipated.”
The company said the trends are “significantly” different than they had expected throughout 2011, a harsh truth being noted by publishers of all kinds this year. But it was particularly concerned after an April deal that saw AT&T sell a majority stake in its phonebook division to Cerebrus Capital for about $950-million, which was “considerably less” than Yellow Media would have expected.
“[The deal] was for a price considerably lower than our estimated enterprise value,” the company said. “The transaction highlights the challenges and the execution risks associated with our business and the industry in which we operate as we attempt to transition from a print-centric business to a digital company.”
YLO Preferred C and D time arbitrage (60 Days)
The mechanics are simple. There will be a dividend paid to C and D in cash when A and/or B are converted. Thus, the earliest conversion date to convert A and B is June 30th at which point 2 dividends are in arrears.
Here is the idea. Pay <$0.70 today to own Preferred C and D shares. Get paid a $0.84 dividend minimum sometime between June 30th 2012 and December 31st 2012. Keep your preferred and see if it rises to par value of $25. Note, you paid $0.70 to own it.
The idea is this, YLO more or less has to convert A’s and B’s to common. On conversion, this triggers a payment of dividends across the preferred classes. The earliest they can convert the B’s is June 30th 2012. In my discounted cash flow analysis, I found that the company either:
1. Has to convert the A’s.
2. Has to refinance their debt.
Either way you win big on the C’s and D’s.
So, what am I missing here? I’m open for suggestions or ideas but this looks eerily close to a risk free return of your cash with over 4000% upside. Please contact me if you can see flaws in my logic.
Two dividends on the C’s and D’s is around $0.84. So, if you can buy for $0.70 today and get a cash dividend of $0.84 on June 30th, you have a risk free return of your capital. Beyond that, there is the upside to par value of $25 and additional dividends. Just saying.
I think that I might have found something. Upon further investigation of the terms of the C and D shares, I believe that the mechanics of the situation will lead the company to pay out a dividend to them of $0.84 around June 30th. Right now, the price of the shares is $0.70 or less. That and I believe that the preferred shares are worth $25.
So, this appears to be a risk-free return of your money with an attached potential upside of 4000% return. $31 / $0.70 is the math for the upside.
I can’t figure out what I might be doing wrong? I think that this might be something that it would be worth having a lawyer look into.
The Series 3 Preferred Shares will be entitled to fixed cumulative preferential cash dividends, as and
when declared by the board of directors of YPG Holdings (the “Board of Directors”), payable quarterly on
the third last business day of each of March, June, September and December at an annual rate of $1.6875
per Series 3 Preferred Share for the initial five-year period ending on September 30, 2014
On and after June 30, 2012, YPG Holdings may, at its option, upon not less than 30 days and not more than 60 days prior written notice,
redeem for cash the Series 2 Shares
So this means that the B’s are not convertible till June 30th but the C’s and D’s get their dividend paid out June 27th. So, it is my understanding that the A’s and B’s will likely be converted to common, with an announcement coming as early as tomorrow. Upon conversion, per my discussions with the company, all preferred share class’s dividends in arrears will be paid out.
The following was processed in your account ending in 140 on 05/01/2012:
|
Action |
Quantity |
Symbol |
Unit Price |
Principal Amount |
|
Bought |
1,500 |
.6299 |
$944.85 |
This is not an official trade confirmation. You will receive your official trade confirmation via U.S. mail or via Schwab eConfirms™.* Commissions and fees are not included in the principal amount listed above.
so, what this purchase gets me… for 63 cents, i paid $944. I will get 1500*0.84 in dividends when the a’s are converted, probably after june 30th along with a potential conversion of the b’s, so i paid $944 and i’ll get a dividend of $1260.
Then, I get to keep free preferred shares
this goes to show how much fear and panic there is out there right now. people are selling the preferreds at less than the dividends that they are going to be forced to pay by EOY.
Glen
Look at the comparables: DEXO, SPMD, PAJ, YELL.LON, etc.
Can we agree that both equity and credit analysts hate phone books? Can we agree that everyone is scared?
Can we agree that markets are not rational and are occasionally susceptible to bouts of irrationality? IF we can’t agree on those, then this argument is stuck in dead water, but when I bought CNO Conseco at 38 cents in 2009 and sold at $5, I felt like I was taking advantage of market irrationality just like I do today in YLO.
So, we agree that people and humans are not perfect. What matters to me as an investor is not what has happened, but what is going to happen. Looking at the matrix of smart/dumb decisions that could be made on a forward basis, seriously, I wonder if there are people in place that are going to make unbelievably stupid decisions. Honestly, the answer is no. The decisions in the past that were bad were biased by historic thinking. Now, they’ve cut everything and are looking at everything with fresh eyes which is what you need.
Is tellier going to give the company to creditors? NO. There is not a bone in my body that thinks he’s just going to give up and be an idiot and give creditors a multi billion dollar company just because he can, and in fact I don’t think he can… What you are looking at is a situation that is pricing in:
1. Everyone on the board of directors, CEO, all of the committees, think that the stock market is right, the company is worthless and are going to give over the company to creditors. Is this likely? LOL, are you kidding me that we are entertaining this idea?
2. 25%+ annual declines in print, company goes into receivorship. Is this likely? I don’t think that this is realistic either.
So, I am beting that because 1 and 2 are not likely, that the most likely outcome is $1+ on the commons at some point in the next 2 years. Do I trust Tellier and the BOD? Yes. The bad decisions in the past were subject to human misinterpretation. The decisions that you are looking at now are not subject to that, and are subject to proactively sabotaging a company that based on my interpretation of everyone involved at the decision making level, is not in their best interests to do.
Does that assist in supporting my perspective that Tellier is the best man for the job?
Gary Heavin
http://finance.yahoo.com/news/5-midlife-millionaires.html
Gary Heavin
Courtesy of Gary Heavin (Pictured here with wife Diane)Occupation: Co-founder and CEO, Curves International
Age: 57
Age when he hit it big: 40
Advice to midlife entrepreneurs: ”You have to be willing to put security at risk in order to have the potential for wealth.”
Heavin learned valuable entrepreneurial lessons watching his father, who was born poor, build a successful manufacturing supply company. In 1992, Heavin started his women-only gym franchise with wife Diane. It was an immediate hit. Today, there are nearly 10,000 Curves fitness clubs in more than 85 countries.
Heavin’s midlife success didn’t come easy, however. At 20, he dropped out of college to start his first gym business. He was a millionaire by 25 — and bankrupt by 30. “I had lots of business ideas, but they weren’t lasting,” he says. “At 25, it was all about me, and that’s a foundation for disaster.” With his wife Diane’s help, he was able to regroup and start fresh with a new, better business model for what would become Curves.
Heavin credits his success later in life to his early failure: “One big thing I’ve learned is that when you’re wealthy at a young age like I was, it has a lot to do with luck. When you’re older, it has a lot to do with experience.” For other budding entrepreneurs who are late bloomers, Heavin offers these words of advice: “People cling to security. I’ve found that the more educated a person is, the less they’re inclined to take a risk . . . You have to be willing to put security at risk in order to have the potential for wealth.”
Edward AT&T Dumps Yellow Pages Business: What This Means For Yellow Pages In Canada
AT&T Dumps Yellow Pages Business: What This Means For Yellow Pages In Canada
AT&T (T) dumped their Yellow Pages business a few days ago. They sold a 53% stake to the private equity firm Cerberus Capital for $950M, effectively valuing the company as a whole at $1,792M. Given that their EBITDA for 2011 was $1,029M, the EBITDA multiple associated with this deal is 1.74x. Yellow Media Inc (YLWPF.PK) – the company that runs the Yellow Pages business in Canada – achieved an EBITDA of $680M for 2011. Their stock has been pummeled from over $6 to 7 cents in the course of 14 months as there is a perceived threat that the bondholders and banks, who are owed a little over $1.5 billion net of cash, will overtake the entire equity portion of the business, leaving current shareholders with next to nothing. If we consider the 1.74x multiplier for the AT&T Yellow Pages business as a barometer, the threat seems real as that would value Yellow Media at $1,190M, well less than their debt obligations.
However, when looking at this deal we have to consider several factors, the number one factor being that as a monopoly in Canada, the Yellow Media business has superior cash flow prospects to any of the counterparts south of the border. Review the chart below.
AT&T’s Yellow Pages business attained $1,029M of EBITDA on $3,293M of revenues for a 31.2% EBITDA margin in 2011. The Yellow Media business attained $680M of EBITDA on $1,329M in revenue for a 51.1% margin in 2011. Further evidence of Yellow Media’s superior ability to extract revenues from the Canadian economy is considering that they attained $1,329M in revenue from a population of about 33.5M or $40 revenue per capita. Meanwhile the AT&T Yellow Pages business covers a population of 150M people for $22 revenue per capita, barely over half of Yellow Media’s per capita revenue. There is something structural about the Canadian economy that would suggest a print directory business does much better there than its US counterparts. The ability of the Canadian Yellow Pages business to extract monopoly revenues from the print business and associated economies of scale with holding a monopoly in a country where print still has a dominant role to play in its economy suggests Yellow Media deserves a significant premium over the AT&T deal.
Reviewing the last 8 quarters of each company tells us even more.
(click to enlarge)
AT&T’s print directory business is getting absolutely hammered. As bad as the revenue drop of 16.3% from 2010 to 2011 is, it is made even worse by the 23.9% decline in EBITDA which has steadily been picking up pace, topping out at a 25.7% decline in Q4. Contrast that to Yellow Media. While revenue has shrunk over 9% in each of the past two quarters, they turned around EBITDA in Q4 and actually slightly improved their margin from 46.7% to 47.0%.
Cerberus Capital didn’t pay 1.74x multiple of EBITDA for a company that is flat lining, they paid that amount for an entity that saw its EBITDA drop over 25% for the latest available data point in Q4 2011. At this pace, Yellow Media’s EBITDA will catch up to YP Holding’s EBITDA in two to three years. As seen in the last row of the chart, Yellow Media’s EBITDA as a percent of YP Holding’s EBITDA rose from a little over half to two-thirds from 2010 to 2011.
If we were to base the deal on forward looking EBITDA instead of 2011 EBITDA and if we were to estimate 2012 EBITDA based on 2011′s decline rate, YP Holdings’ EBITDA would be due for another 23.9% decline, or $783M. A $1,792M valuation would imply a 2.29x multiple. Declining Yellow Media’s EBITDA by another 10.2% in 2012 would land it at $610M. A 2.29x multiple implies a valuation of $1,397M.
Another thing to consider is that the AT&T Yellow Pages business benefits from having been carved out from a greater corporation. The Yellow Media business is valued as a full corporation and is very limited in what it can hide with respect to operating performance. It was well-known that AT&T was looking to sell their Advertising Solutions wing as 2011 wrapped up so the likelihood that window dressing took place as far as their auditors would allow cannot be overlooked. If there’s a customer being billed for other AT&T services in addition to a Yellow Pages listing and they received a bundling discount or some other type of incentive, would the other divisions pick up a disproportionate part of the contra revenue associated with the discount?
Of greater concern would be on the cost side. With a dinosaur corporation like AT&T there is a very good chance that divisions performed work for multiple revenue-generating units, particularly those providing support work to client-facing divisions like Finance and HR. Are those supporting business units costs fairly distributed within the Yellow Pages business when calculating their EBITDA?
Total revenue for the business was $3,293M and operating expenses were $2,264M in 2011. If revenue was overstated by just 1% and costs are understated by 2%, this leads to a $33M overstatement in revenue and $45M understatement of costs for a total EBITDA overstatement of $78M. Of course this is just speculation on my part and the true window dressing figure could be greater or lower than my back of the envelope calculation – or possibly none at all – but Cerberus Capital is not stupid. They would know that some level of window dressing potentially took place and that their bid would have to reflect that. If my $78M is anywhere near to their guess, the $1,792M valuation of the newly-formed YP Holdings LLC would be based off a 2011 EBITDA estimate of $951M, not the actual amount of $1,029M, for a multiple of 1.88x.
Considering that Yellow Media owns a Yellow Pages business that has a virtual monopoly on the print directory business, extracts revenue per capita that is nearly double that of its recently sold US counterpart, has an EBITDA margin that is 20% higher than YP Holdings, has EBITDA and revenue numbers that are declining at a much slower rate and is a fully intact corporation that cannot window dress their numbers, valuing it at a similar 1.74x multiple is grossly underestimating its true worth. I tried to quantify how much the window dressing effect and slower revenue decline could positively affect Yellow Media’s valuation. Combining these two effects would see the company be valued at 2.47x 2012 EBITDA.
However, what can’t be so easily quantified are the excess monopoly profits and the stronger performance of print directories in Canada. Using the $40/$22 ratio as a guide that would imply a 1.82 multiple of the 2.47x, resulting in a 4.5x 2012 EBITDA target valuation of $2,745M. Seeing as how that seems a bit too high, throwing a reasonable number of 3x 2012 EBITDA would value the company at $1,830M. This number seems about right when looking at the AT&T business as the two company’s EBITDAs will likely converge in two to three years based on current trends and $1,830M number is just slightly higher than YP Holding’s $1,792M effective valuation. Also, many Yellow Media bondholders speculated that the company could be worth between $1.4B and $2.2B - my $1.8B estimate is right in the middle of that range.
With Yellow Media valued at $1,830M, that leaves little question that the bondholders and banks will get the bulk, if not all, of their money back. After the recent decline in all of Yellow Media’s securities, the bond’s prices have been on a steady increase with the 2013 MTNs moving up to 60 cents on the dollar. I have little doubt that a buyer of the bonds at these prices will profit as they will continue to be bid up until they are at par or some kind of corporate transaction takes place where they are bought back for less than par but higher than where they are today.
The real interesting play becomes the equities. With a 3x multiple on 2012 EBITDA, there is about $300M in excess value left for shareholders. I won’t speculate as to exactly how that $300M would have to be divided up in order for common shareholders to approve a purchase of the company or a restructuring of the debt through CBCA, but I would expect both preferred shareholders and common shareholders to benefit greatly relative to current prices on those securities. The combined market capitalization of all common and preferred securities is about $55M, giving them about a 5x to 6x upside based on my valuation.
Yellow Media common shares trade on the TSX under the symbol YLO. The four preferred series trade under YLO.PR.A, YLO.PR.B, YLO.PR.C, and YLO.PR.D. The company’s debentures trade under the symbol YLO.DB.A.
Disclosure: I am long YLWPF.PK.
Please help improve Seeking Alpha:
Did you find this article useful?
-
Print
These assets are likely worth more if held for cash flow rather than sold off. Even with the current rate of decline, Cerberus will probably make 20% annual returns from this purchase. Yellow Media will not be forced to sell its print division as long as it can continue to retire its debt as it comes due, so at least two years from now.
Online revenues account for 30% of YM’s sales and growing. Yellowpages.ca and Redflagdeals.com are top 100 websites based on traffic in Canada. YM recently sold two online properties with lower rankings for 10x EBITDA. Management is guiding for a return to overall growth in 2014 driven by online revenues.
Once bank debt is retired or covenants are renegotiated, YM will be able to repurchase bonds, likely at a discount to par. This will reduce the debt load faster and free up cash that would otherwise go to interest payments.
I agree with you that the equity is likely worth considerably more than current prices.
http://bit.ly/J4AW58
http://bit.ly/J4AVhF
http://bit.ly/Ip7wek
In addition now that Canpages is gone, YLO is now the de facto encumbent print directory whale in Canada.
http://bit.ly/HSmixd#
http://bit.ly/HTFhTh
1) If/when the A&B are converted, a dividend for arrears will be paid on the C&D.
2) A&B, since they can be converted to common, are lower in the capital structure than the C&D — So in any kind of restructuring the C&D would get much better terms.
3) If A&B are converted to common, the B would get an entry at around $0.0384. There would be around 750M common shares outstanding after conversion (ballpark number to make it easier, i’m pretty sure it would be higher than that off memory). With bank debt, senior debt, debentures, pension obligations, C&D preferred… How much value is left for common in your analysis? 300M? 500M? 750M? Lets be generous and assume 750M, or $1 per share. From the 0.0384 entry point, that means a 26.04x bagger.
C&D preferred are worth $25 if there is 750M value to the common. You can buy them now for 70 cents. 25 / .70 = 35.7x bagger.
On top of that you get a 200% yearly dividend accumulation from current prices while you wait for the situation to resolve itself with the C&D series. So every year adds a 2 bagger to that total.
So you have greater protection in many scenarios from being higher up in the capital structure, have dividends accumulating quickly and have higher upside with the C&D series.
The B series, converted to common, would only reach the same upside as the C&D if the common fair-value price exceeds $1.37088 or the equivalent of 1028M value for the common (based on that 750M share number which is rough).
Just what enterprize value and EV/EBITDA would you need to assign to YLO for the common to be fairly valued at 1.028 Billion? Too high a bar from my mindset…
So yea, thats why I own the C&D (and bonds).
-Fernando
Oh and are we basing the valuation on the actions of Cerberus, the brilliant investor that bought Chrysler at the worst point in time imaginable?
Several years ago, a broker tried to convince me to buy Yellow Media in Canada when it was about $12 or so instead of purchasing Interpipeline (IPL) when it was about $9 and change. I stuck to my plan and bought Interpipeline instead.
Since then, I have collected oodles of dividends and IPL has more than doubled while Yellow has dropped into the cents range.
To me, buying Yellow is like eating putrid sardines from a previously opened can!
I could argue if they were wrong to recommend to buy the equity at $12, they were wrong to recommend to sell the equity sub-10 cents.
Regarding Cerberus, this is the latest data point we have to value the company. Like them or not, Cerberus is in business for good reason. Since 2008, many of the weakest links in the investment industry have gone under. If Cerberus is still around, they can’t be THAT bad as you assume. In fact, I’d say the opposite. If they learned enough from the Chrysler deal to still be around, the Yellow Pages deal is very likely to be a good one on their end.
http://bit.ly/I3UqDK
Czosnek, you said you owned the MTN due in 2013. Would you agree to shareholders getting a portion of the restructured company now while debt holders receive most of the new equity in the company (say around 90%) or would you prefer to wait it out?