Fitch: Yellow Pages free fall evident in Cerberus acquisition
April 10 (Reuters) - CHICAGO, April 10 (Fitch) The announced sale by AT&T of a 53% stake in its yellow pages directories unit to Cerberus Capital provides additional evidence that directory publishers' credit fundamentals are deteriorating, likely pointing to a new round of restructuring in the industry. Fitch Ratings sees the low implied valuation multiple on the transaction as broadly reflective of the continuing decline of revenues and cash flow in a once-important segment of the print advertising market. The long-expected disposal of a majority stake in its Advertising Solutions unit represents a fulfilment of AT&T's commitment to exit the directories business as print advertising trends weaken and cash flow declines rapidly. We estimate that the sale of the majority stake for $750 million in cash and a $200 million note from Cerberus implies an enterprise valuation multiple of 1.8x 2011 EBITDA. This distressed valuation underscores the absence of meaningful growth opportunities in the yellow pages business, despite the fact that it could still generate a respectable cash flow margin over the near term. The 1.8x implied multiple is significantly below other valuation data points for the media space. The average media and entertainment market enterprise valuation has hovered between 6x-7x in 2012. Over the past 10 years, the sector's low-end multiple is around 6.0x. Fitch uses an average distressed multiple for media and entertainment companies in its recovery analysis of approximately 5.0x. The potential for pure-play directory companies to face a second round of bankruptcy reorganizations has been evident recently in their poor operating performance and the need to approach creditors for relief. Both Dex One and SuperMedia, which restructured under Chapter 11 and exited with streamlined capital structures in 2009-2010, have been forced to take the unusual step of completing distressed exchanges on their first-lien term loans. Both companies are strong candidates for a return to Chapter 11. Much like newspapers, yellow pages directories have not participated in the broader advertising recovery as digital alternatives to print grow in importance. The yellow pages business has been in an accelerated decline over the past few years. Initially, the business suffered during the recession as small firm advertisers such as auto dealers cut spending and failed. In the current environment, we believe many smaller advertisers are choosing to cut costs by posting ads in only one local book. A turnaround in the business is unlikely as advertisers increasingly look to low-cost digital media outlets. We believe the directories business could suffer double-digit revenue declines for the next several years, severely lagging the overall advertising market by 10-15 percentage points. Contact: Mike Simonton Managing Director Leveraged Finance Fitch, Inc. 70 W. Madison Chicago, IL 60603 +1-312-368-3138 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602
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