April 10, 2012 / 5:51 PM / 7 years ago

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 	
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. 	
Mike Simonton	
Managing Director	
Leveraged Finance	
Fitch, Inc.	
70 W. Madison	
Chicago, IL 60603	
Bill Warlick	
Senior Director	
Fitch Wire	
Fitch, Inc.	
70 W. Madison	
Chicago, IL 60602
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