NZ Yellow Pages showcases dangers of bull market LBOs

“The current economic climate was not well suited to large-scale merger and acquisition activity ... as a result, the expectations of the stakeholders in regard to value are unlikely to be met in the current market,” Unitas and Ontario Teachers concluded in a statement, noting that a long-term debt restructuring plan will come in lieu of a strategic sale.

In 2007, Unitas and Ontario Teachers paid NZ$2.1 billion ($1.57 billion) for the asset.,12.9x Yellow Pages’ earnings at the time. It is understood they were seeking a much lower price of 6x – 6.5x. to sell it off

Debt and the banks

The deal is unfortunately a prime example of a bull market LBO gone wrong post-GFC. Per the terms of the 2007 transaction, New Zealand Yellow Pages’ balance sheet is still saddled with NZ$1.8 billion ($1.32 billion) in debt owed to a 25-member consortium of lenders including Deutsche Bank, RBS and Macquarie Group. In April of this year, the loans – which were classed as distressed debt – were already trading in Australia’s secondary debt market. At the time AVCJ reported the bank lenders that provided the leverage for the LBO had agreed to a standstill on debt repayments until the end of May, and that Yellow Pages had hired UBS to advise on its options for restructuring its finances.

“Taking a step back and examining the cash flow Yellow Pages is generating, the asset has elements of being distressed, but if it weren’t for its debt to these lenders, the balance sheet would still be in a good position,” one industry figure close to the deal told AVCJ in July. “Now, the multiple of EBITDA cash flow that someone would be willing to pay is not the 13 – 14x seen in 2007, but maybe between 8 –10x, which is still respectable.”

Now even that has fallen flat, a shame for an asset that still has its merits. Yellow Pages is still the biggest brand of its kind in New Zealand’s 4.3 million market.

“In Asia Pacific there are only a handful of markets that do 100% buyout transactions, and Australia and New Zealand are two of those markets; in the heyday of the boom a few years ago they were popular places to do business,” one industry player tells AVCJ, adding that this should have worked in Yellow Pages’ favor. “This would have attracted PE funds from other folks who have bought Australian assets … you find a lot of interest in New Zealand companies from Australian-headquartered funds and also bigger global private equity firms.

“Any time there’s a distressed sale there are a lot of tricky issues considering existing lenders who are not getting 100 cents on the dollar,” the informant continues. “The new buyers who examine the asset will also have wanted to buy a fairly clean company.”

Video killed the radio star

In addition to the debt – a hallmark of the megafund buyout era – AVCJ industry feedback confirms that directories were a big PE target in the mid-2000s globally. In 2004, funds Apax Partners and Hicks, Muse Tate & Furst first floated  the UK’s Yell, the Yellow Pages directories group, on the LSE, earning £793 million ($1.25 billion). Months later, the funds offloaded their remaining 34% stake in the group, garnering GBP700 million ($1.1 billion), bringing its total winnings to 2.5x their original investment. One year later, Verizon Communications put its US directories business up for sale targeting up to $17 billion. At the time, Carlyle Group, which had sold directory Dex Media to RH Donnelley for $9.5 billion, was also eager to get into the deal.

However, a combination of digitizing media habits as well as the GFC’s effect on advertising dollars, have drained Yellow Pages of its expected value. Analysts estimated the business value at NZ$900 million – 1 billion ($651.8 – 724.2 million) when the asset first went up for auction. At the time, CVC Capital Partners, Kohlberg Kravis Roberts & Co. and Pacific Equity Partners were thought to have been approached as potential buyers, as well as potential strategic suitors such as Australian directory aggregator Sensis, an arm of formerly government-owned telecommunication giant Telstra Corp. Although some of these parties are said to still have interest in the asset, none of the offers were reportedly very high. 

Further reading

Yellow Pages auction up a gum tree?

• Australasia
• 27 Jul 2010

Unitas, OTPP ready NZ Yellow Pages for sale

• Media
• 23 Jul 2010

Unitas, Ontario Teachers suspend NZ Yellow Pages sale

• Exits
• 29 Sep 2010

NZ Yellow Pages LBO debt in standstill deal

• Australasia
• 22 Apr 2010

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• Topics
• Australasia
• Media
• Exits
• Performance
• Restructuring
• Unitas Capital
• CVC Capital Partners
• KKR
• Pacific Equity Partners
• Apax Partners Hong Kong