He decided to go direct. It took him a while to learn his way around Google’s advertising, but he now pays $10,000 per year for all the times people click on his sponsored search results—far less than he would have paid with Yellow Pages.
Yellow Media claims to be “Canada’s #1 Internet Company,” but the boast confuses its legacy business with its future business, where geography means little. “Everyone uses Google, uses Bing, uses Yahoo. It doesn’t matter where you’re located,” Gregg says. “I don’t care if you’re number one in Canada.”
For all its problems, Yellow Media remains a business that generates a sizable amount of cash. The company has a basic operating margin of about 50%. Even in the second quarter of this year, while its net results were pushed to a loss because of a $50-million writedown in a money-losing investment, its EBITDA (earnings before interest, taxes, depreciation and amortization) was a fat $176 million on revenue of $343 million. Annual revenue for the past several years has been stable at about $1.6 billion.
A successful business doesn’t die overnight. But one incident can make a chronic illness dramatically flare up. With Yellow Pages’ client list steadily bleeding away, a weakening of earnings in the first half of this year was enough to make Tellier’s acquisition spending spree finally come back to haunt him.
The burden showed up in substantial numbers on the balance sheet, as the company carried $2.5 billion in debt it seemed in no hurry to address. And this while the market’s tolerance for debt exposure in a highly vulnerable print media player was fading fast.
“Print media companies are constantly having [the value of their business] re-evaluated. If your debt levels are even at 2.5 to three times EBITDA, the exposure of the stock is just magnified,” says Canaccord Genuity analyst Aravinda Galappatthige. Companies with a large debt load see the value of their equity contract faster as the market questions the future of their business. That’s part of what drove Yellow’s stock down. It didn’t help that short sellers, who bet on a stock’s price going down, were active in Yellow this year.
The heft of the debt turned off even faithful investors like Calgary-based Bissett Investment Management, which had held shares in Yellow from the time of its IPO. By the end of 2010, just before the stock’s precipitous decline commenced, the fund had decided to sell. “It’s not really an operational problem at Yellow Pages. It’s not perfect, but it’s fine,” Bissett senior vice-president Leslie Lundquist says. “The real problem comes from how the balance sheet has been managed.”
Tellier and his chief financial officer, Christian Paupe, were criticized for taking little action as those concerns mounted. In 2009, the company had debt of $2.5 billion. At the beginning of this summer, the load had barely budged, at $2.4 billion.
Then, in March, Yellow Media sold the auto listings segment of the Trader unit for $708 million, taking a nearly $400-million loss. Even if the sale sounded like a strategic defeat, analysts largely said it was the right move, since Yellow Media needed the cash to pay down debt.
Instead, the company moved to bolster its stock. It introduced a share buyback program, spending its cash on common and preferred shares. This was not the signal Bay Street wanted to receive. First of all, some of those preferreds were coming up on a deadline that would have allowed Yellow to convert them cheaply into common stock. So the company wasted cash on subordinate debt that would normally be last in line to be paid back—and that could have been exchanged for devalued stock. Second, Yellow missed an opportunity to retire more pressing debt. While the company did pay down $238 million in senior bonds during the summer, observers said Yellow should have done much more, especially since that debt was trading at distressed levels and the company had the cash to pay it down on the cheap.
“It didn’t handle its senior debt.... This will go down as one of the greatest blunders a board, management team, CFO, have made in Canada,” declares Paul Tepsich, the founder of High Rock Capital Management, which has owned Yellow Media senior unsecured bonds in the past. “Selling a valuable asset, Trader, at [a price equal to]10 times EBITDA, that should have been a credit-changing event for the positive, turned into a credit-changing event for the negative and imploded all of the capital structure.”