Heavily indebted Yellow Pages attracts potential private equity suitors

The heavily indebted Yellow Pages Group (YPG), put on the block earlier this year by its nervous banks, has attracted interest from two or three potential buyers, interest.co.nz understands.

They are said to be parties with expertise and investments in the telecommunications and/or media sectors. They could include private equity groups such as Providence Equity Partners, The Carlyle Group and CVC Asia Pacific.

With debts of at least NZ$1.7 billion following its heavily leveraged purchase from Telecom three and a half years ago, and falling earnings threatening its banking covenants, YPG has been at the mercy of its banks - led by BNZ - for several months.

The debts include a senior debt facility of about NZ$1.275 billion including working capital and capital expenditure facilities, each valued at about NZ$50 million. The senior debt holders include the BNZ, ANZ, Westpac, Deutsche Bank, Credit Agricole Corporate and Investment Bank (formerly Calyon), Barclays, Macquarie Group, Allied Irish Banks and the Royal Bank of Scotland. The working capital facility is provided by ANZ and Westpac.

The company also has a subordinated debt facility worth about NZ$315 million and a ‘Payment in Kind’ facility of about NZ$228 million. Providers of the subordinated loans included Barclays Capital, ABN Amro and Deutsche Bank.

Standstill in place

A standstill arrangement in place covering interest payments on the group's debt is likely to continue rolling over until a sale, or other solution, is found. YPG had interest payments of NZ$154.3 million in the June 2009 year.

Bidders have been offered a stapled financing package provided by a consortium of banks including YPG's existing senior debt holders. This five year facility could help any buyer fund the deal through a loan worth up to five times YPG’s forecast earnings before interest, tax, depreciation and amortisation (ebitda).

The group’s forecast to produce ebitda of about NZ$133 million in the year to June 2011, down from about NZ$157 million in the just completed June 2010 year.

Interest.co.nz was told a sale price for the directories group, including the loan package, could be for between NZ$650 million to NZ$750 million at the "optimistic end." This would mean a buyer may not have to stump much much in the way of equity.

A priority for any new owner will be revamping YPG's struggling online presence as advertising clients, in growing numbers, shift focus from phone books to the internet. Here, competition has just taken another step up with online auction site Trade Me launching a services category targeting small business advertisers and consumers wanting to search for service providers.

Where's Telstra?

What's not clear is whether Australia's Telstra, owner of the Sensis directories group, retains an interest in buying YPG. A spokeswoman for the company told interest.co.nz in July that Telstra-Sensis would consider any business that suited its strategy, but wouldn’t specifically comment on YPG. The Australian newspaper recently reported that Telstra wouldn't bid as it viewed New Zealand as a low-growth market compared with Asian economies such as China, and because Sensis' information technology systems were no longer compatible with YPG.

However, local investment banking sources aren't convinced that Telstra is completely out of the running with one suggesting Telstra was probably “hanging around waiting at the bottom of the cliff,” given it was a natural buyer as the owner of Sensis, a big directories business facing similar issues to YPG.

'Tyre kickers?'

Interest.co.nz is also aware that at least one potential bidder was effectively told; “Don’t bother bidding, we’ve got better offers,” ahead of the August 24 deadline for indicative offers.  Those who did lodge indicative offers are said to now be in bilateral negotiations with YPG and its banks' representatives, led by Goldman Sachs, which also advised Telecom on its blockbuster 2007 sale.

Telecom sold YPG for NZ$2.2 billion in March 2007 to Hong Kong-based Unitas Capital (formerly CCMP Capital Asia) and Canada’s Ontario Teachers’ Pension Plan at the peak of the market globally for such debt funded leveraged buyouts, just before the global cheap credit bubble burst. If a sale goes ahead, the owners face crystallizing a complete loss on their investments. Of that purchase price, NZ$1.5 billion was funded through borrowings from about 36 lenders. Some of the original lenders have since sold out, including the Accident Compensation Corporation.

Among the potential private equity suitors, Providence's investments include the Seattle-based WhitePages, an online provider of people search services and Danish telco TDC. The firm says its sector focus and international mandate lets it dedicate "our full resources to building global leaders in the media, entertainment, communications and information industries, regardless of location."

CVC Asia Pacific owns 75% of Australia's PBL Media, the former Packer family media empire, and The Carlyle Group has investments in a wide array of telecoms and media interests.

* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.