April 10 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
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.
70 W. Madison
Chicago, IL 60603
70 W. Madison
Chicago, IL 60602