There was more grief to come. In August, Yellow said that in November it would take a $2.9-billion goodwill writedown, reflecting that the “fair market value” of its assets has significantly declined. More crucially, the company posted a loss, and had its debt downgraded to junk status by Standard & Poor’s (DBRS followed with the same call in September). The stock slide accelerated further. Within 35 days, the company fired Paupe, the CFO.
It was a stunning decline for a company that had made its name paying out stable distributions. After the company became Yellow Media last year following its conversion from an income trust to a corporate structure, it attempted to hold on to this heritage by continuing to pay a dividend—though it was down slightly, to 65 cents.
But this only compounded the problem. Given the downward trends involved in the switch to digital platforms, the calls mounted for Yellow to eliminate its dividend entirely— it wasn’t sustainable.
After its downgrade in August, Yellow cut its dividend to 15 cents to save money for debt payments. But it wasn’t enough. Yellow had a credit facility with its banks that included a covenant preventing the company from paying a dividend of that size if its debt was not investment grade. The downgrade triggered those conditions, and the banks came calling. “It was like they intentionally violated the credit agreement. I don’t know why,” Tepsich says.
The banks demanded $500 million of their money back, and a further $25 million every three months. Yellow finally cut the dividend to zero. The squeeze from the banks, plus the money paid back on its medium-term notes over the summer, means Yellow Media’s debt is now sitting at $1.8 billion. The Trader proceeds are gone, and management no longer has as large a credit facility to draw on; that constricts the company’s access to cash, especially come 2013, when its bonds begin to mature and must be paid back as well. “After 2013, it gets tight, cash-flow-wise,” Galappatthige says. “Now it’s a question of long-term solvency.”
Until this year, Tellier’s position was that the naysayers simply didn’t understand the inherent value in his company. His frustration has been transparent on conference calls as he tries to sell his transformation story to analysts who have mostly tuned him out.
But after Yellow announced the new, more stringent credit agreement with the banks in late September, Tellier admitted the prospects for the company’s transition—whether digital businesses will be able to compensate for declining print revenues—are far from certain. The same might be said of his tenure as CEO.
Tellier says Yellow Media has now demonstrated its commitment to reducing debt, and wants the conversation to shift. “What has been frustrating this year, is there has been so much focus on debt and short selling, and ‘Will we meet financial obligations?’ and so on; it would be great for someone to step back and appreciate that this business is in transformation,” he says.
Yellow Media still counts 354,000 advertisers in its client base, but even with its digital solutions, that number has been eroding steadily; two years ago it was at 405,000.
Tellier points out that his company has been quicker to build its digital presence than others in the print media. Many newspaper companies have only managed to reach 10% of their revenues from digital businesses—though The New York Times sits just ahead of where Yellow is, with 28%. “Am I proud of the fact that on an annualized basis we generate around $345 million of revenue online? Yes. That was $8 million the first year I was here,” he says. “Our progression has been good. The question is, has it been good enough and fast enough? Clearly we’re not where we need to be. But we’re not a market laggard either.”
But as the perception of Yellow Media’s value dwindles to nearly zero, Tellier is now in a race to change the story. Despite its historically huge profit margin, its powerful brand and street-level connection to its customers, Yellow Media was bound to hit some potholes transforming itself for the digital era. What its management didn’t need to do was to turn potholes into sinkholes by acting as though the sheer size of the print business meant that its debt would never catch up with it.
If Tellier is to prove that the business is not indeed worth zero, he’ll need to manage Yellow Media’s finances more adroitly than he has this year. Otherwise, the company’s fortunes, like Aimee Davison’s Yellow Pages Mountain, will eventually be relegated to the recycling bin.