AT&T Advertising Solutions publishes printed yellow pages directories and AT&T Interactive offers on-line, mobile and IPTV accessed local search, both seeking to connect local merchants with local customers. Assets include:
- Approximately 1,200 The Real Yellow Pages print directory titles delivered to 150 million homes and businesses in 22 states,
- YPmobile app, allowing users to search for local businesses from their mobile device (includes preload agreement with AT&T on non-Apple devices),
- YP Local Ad Network, which includes YP.com and 300 independent mobile and online publishers reaching more than 76 million monthly unique visitors, and
- 5,000 person local merchant focused salesforce and a legacy of relationships.
Combined, AT&T’s print, online and mobile products serve over 500,000 local businesses and receive about 5 billion consumer searches a year (of which 2 billion are on digital properties and 600mm are originated from a mobile device) for local business information. The businesses have 8,400 employees (half of which are unionized). The sale does not include the recently formed AT&T AdWorks that sells advertising-related services across 3-screen platforms (online, mobile and TV).
Cerberus is a private equity firm investing in multiple sectors including technology, aerospace and defense, consumer products, automotive and industrial, financial services, healthcare, real estate, transportation and the travel and leisure sectors.
AT&T will receive approximately $750 million in cash and a $200 million note and retain a 47-percent equity interest. These businesses generated approximately $3.3 billion in revenues in CY 2011 (a 16% percent decline from CY 2010 driven by declining print directory revenues). Of the $3.3b revenues, about $1b was related to the digital properties. Although the business units for sale generated $2.3b in operating loss in CY 2011 after a $2.9bn impairment charge, EBITDA was positive at $1.0bn.
Implied Enterprise Value (EV): $1.8b
EV/CY 2011 Revenue — 0.5x
EV/CY 2011 EBITDA — 1.7x
Other private-equity companies that made investments in Yellow Pages businesses include KKR’s $4.2b purchase (at 5.2 times revenue and 13.3 times EBITDA) of France Telecom’s PagesJaunes in 2006, Hicks Muse Tate & Furst and Apax Partners’ $3.0b (at 2.8 times revenue and 8.1 times EBITDA) purchase of BT Group’s Yellow Pages unit in 2001.
The local print directory business has been under significant pressure for quite awhile. Idearc, Verizon’s directory business which was spun off in 2006, went through bankruptcy proceedings in 2009. It was rebranded as SuperMedia in January 2010 and has continued to struggle with Moody’s downgrading its credit rating last month to Caa3. Dex One, a former directories publisher of Sprint, also went through bankruptcy in 2009. Yell, a spin-off of U.K.’s BT Group’s directories business, which owns U.K. and U.S. directory brands, had to renegotiate its £2.6bn net debt last December.
Cerberus is acquiring a world-class consumer brand, 500,000 local merchant relationships, a 5,000 person local sales force and a strategic position to help influence $ trillions of consumer local spending.
Architect Partners’ Observations
As we highlighted in our recent Street Fight observations, a major battle is underway to capture a position in the $39 billion local advertising market. Google, Groupon, eBay, Yelp, CityGrid Media, Angie’s List, ReachLocal and many others are building businesses that innovate on the legacy of Yellow Page directories. Cerberus’ challenge will be to continue to purposefully and aggressively reorient an organization which has the dying print directory business in its DNA. The assets at their disposal are quite impressive but can the leadership let the past go and embrace the very fast-moving innovation now occurring in online and mobile?
Clearly, a purchase price of 1.7x EBITDA appears attractive on the surface, however, the print directory business is in steep decline. In the past, in spite of declining revenue, directory businesses were considered “cash cows” which is what originally attracted private equity to the sector. That may have been the case when revenues were flat or declining by 5%-10% per year. The challenge now is that print revenue is decreasing at an increasing rate (last year 16% in this case). Can the expense side of the equation be managed in a way to allow for continued profitable operation, while at the same time growing the digital business?