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Yellow Media - What are the intangibles worth? Add to ...

Are Yellow Media Inc. bonds a bargain after the selloff in the company's securities?

Yellow Media stock has been hammered on concern that the company's business is deteriorating faster than expected. The company's bonds have declined in tandem.

The Yellow Media 5.25 per cent bond due in 2016 is down to 84 cents on the dollar, according to Bloomberg, after fetching better than par in October. That puts the current yield at 9.57 per cent, according to Bloomberg, a nice pickup over pretty much any other five year bond out there.

There's an expectation that the company may cut its dividend to ensure it can handle its debt, which suggests the bonds may be a better place to be.

Step one is deciding whether Yellow can make the interest and principal payments. The bond raters of DBRS still rate the company investment grade, so they clearly expect it to be able to meet the obligations.

The other question is what backs the bonds? And the answer to that depends on how much one trusts the value of the brands at Yellow Media.

As a publishing company the bulk of its assets are its brand, its trademarks, its salesforce and its relationships with advertisers, rather than hard assets such as plants and machinery.

Yellow Media has a bit more than $2.1-billion of debt owed to third parties, of which about $1.66-billion is bond debt. (The bonds quoted above make up about a fifth of that total.)

The debt total drops to $1.4-billion if Yellow Media uses all the proceeds from the pending Trader sale to pay lenders, according to a report Friday by equity analyst Scott Cuthbertson of TD Securities. That drops interest payments, but also reduces cash flow because Trader is a cash-positive business.

Mr. Cuthbertson notes that "after 2011, the ability to repay debt and/or actually delever appears to be much lower due to a massive increase in cash taxes payable resulting from its conversion to a corporation in November 2010."

In light of that, what assets are there to cover the debt should Yellow Media need to raise cash in a pinch?

As of March 31, Yellow Media listed $9-billion in total assets, which looks more than enough.

However, a closer look shows about $938-million can't be counted because it is Trader assets that are held for sale.

That drops the total assets to just over $8-billion. Of that, only a fraction is assets such as cash ($34-million), receivables ($183-million) and property, plant and equipment ($41-million.) Almost all of the assets, $7.65-billion, consist of goodwill and intangible assets.


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