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Yellow pages struggle with Google threat

MILAN/LONDON (Reuters) - Seat Pagine Gialle's PGIT.MI, private-equity owners are in a fix -- forced to pour more money into the Italian yellow-pages publisher to keep it afloat but unable to fund the new products it needs to thrive.

The company’s woes are symptomatic of an industry in which once vital publications -- like Encyclopedia Britannica or the Official Airline Guide -- have had to adapt to the Web. In the case of directories, high debt has compounded the challenge.

With no exit in sight five years after taking over the group, Seat’s main shareholders have gone to top creditor Royal Bank of Scotland, offering to support a 200 million-euro ($254 million) capital hike in exchange for debt-covenant headroom.

“For years, Seat has been managed in order to be sold but now it’s being managed to survive,” said one analyst at an international bank who declined to be named.

“Declining margins could make Seat unable to repay its debt at time when money is needed for new products,” he added.

Analysts believe creditors would want to avoid a technical covenant breach, something that could happen in 2009 or 2010 as classified ads - the lifeblood of yellow-pages companies - slide, hit by Web competition and the wider economic downturn.

“Seat is an asset-poor company and hence offers few assets for banks to recover,” Exane analyst Andrea Beneventi wrote.

But a renegotiation of covenants -- which follows on the heels of similar emergency action by British peer Yell YELL.L in October, will at best buy the group more time, even if RBS RBS.L agrees, analysts believe.

Seat should have enough cashflow to meet its debt repayments for the next two years, but it will have to pay back about 550 million euros to RBS in 2012, according to a financial source, and another 464 million in 2013.

In total, it has about 3.1 billion euros of net debt.

Seat has been trying to sell foreign units but these look less attractive than ever. It did sell German unit WLW last week, but at the cost of a capital loss of 75 million euros.

TOO LITTLE TOO LATE

Once valued for their strong cash flows and even able to pay generous dividends, Europe’s directories firms now look outmoded in the face of Internet competition, while heavy debt burdens restrict any real efforts to modernize, given credit conditions.

Internet giant Google GOOG.O and other online outlets can offer more flexible and far cheaper advertising than print media. Google also offers free listings linked to its popular maps to the small businesses on which directories depend.

BC Partners, CVC Capital Partners, Investitori Associati and Permira PERM.UL bought Seat in a 2003 leveraged buy-out that gave the company an enterprise value of 5.65 billion euros. The next year, the company paid a 3.58 billion-euro dividend.

Citigroup analyst Mauro Baragiola said in a note on Friday: “Seat has to explain how it intends to use the proceeds and 200 million euros appear too little.

Two analysts said Seat needed twice that figure, partly to finance the development of new products, while Exane’s Beneventi has said only a large capital increase -- around 1 billion euros -- would really change the company’s balance-sheet problems.

Citigroup’s Baragiola also said Seat needed to address management issues before asking for money from shareholders.

ONLY FOR THE BRAVE

Seat shares have collapsed by 89 percent since their peak in May 2007 to 5.9 euro cents and Yell shares are down 93 percent to 38 pence. JPMorgan analysts called the two stocks “for the brave only” in a recent report.

Shares in France's Pages Jaunes PAJ.PA, the most digitally advanced of Europe's directories, have fallen about 46 percent during that time, broadly in line with the DJ Stoxx European media index .SXMP.

Seat has put its foreign assets on the block but has attracted little interest. Financial buyers, once seen as natural buyers of such companies, have no room left to leverage.

Seat’s net debt is 5.5 times 2008 earnings before interest, tax, depreciation and amortization (EBITDA), according to UBS estimates. Yell’s is five times and Pages Jaune’s 3.6 times, according to the bank.

Google, whose business model already threatens to make directories redundant, has no need to buy such assets.

Microsoft MSFT.O has cash and is trying to prise niches of the search market from Google -- notably in shopping and related Web services -- and would be the most likely trade buyer, but told Reuters it had not seriously considered it.

John Mangelaars, who runs Microsoft’s consumer and online businesses in Europe, said: “We do look at them but as they typically come with a print component, we prefer to partner.”

Editing by Chris Wickham

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