If you're a CEO, what do you do when you're paying a 12.3 per cent yield, your company is transitioning from a dying industry into the online world, and S&P threatens to cut your investment grade rating unless you offload some debt?
You sell assets.
And that's exactly what Yellow Media did this morning. In a $745-million deal with London-based private equity player Apax Partners, Yellow Media is selling a slew of assets, chiefly Trader Corp., which owns Auto Trader magazine. The deal also includes a 30 per cent interest in Dealer.com, which is a growing site south of the border.
Yellow Media clearly needed to act quickly. Standard and Poor's recently told the company that it needs to reduce net debt by about $450-million this year, to lower leverage to about 3.2 times, or risk losing its coveted investment grade rating. As TD Securities analyst Scott Cuthbertson pointed out earlier this week, an investment grade rating is so important because it means the company can basically do what it wishes.
Chiefly, it allows Yellow Media to pay dividends even if their total amount exceeds distributable cash. Without an investment grade rating, dividends are capped at 50 per cent of distributable cash.
The company's press release this morning proves just how dear its current ratings are, because it made clear that both Standard & Poor's and DBRS have already confirmed the company's ratings post-transaction.
As for the deal metrics, the assets are getting sold for $745-million, but all together they were acquired for about $1.2-billion, according to Desjardins Securities analyst Maher Yaghi. He also noted that the divested assets generated about $69-million of EBITDA last year. That translates into a 10.8 times multiple for the sale, better than Yellow Media's current market multiple of 6.7 times.
Yellow Media also indicated the Trader Corp. assets were sold for about 10 times EV to EBITDA, equating to $600-million, while the Dealer.com stake was sold for about 15 times, amounting to the remaining $145-million of the total price, Mr. Yaghi noted.
It just so happens that The Globe's John Heinzl looked at Yellow Media from an investor's perspective in today's paper. Much of the analysis dealt with the sustainability of a high dividend, which today's deal takes care of, but one of the best insights into the company's business model came from portfolio manager Norman Levine.
"To me, it's a dying business. They're trying to transition to the Internet, but once you go [online]there are all kinds of other options" for searching," he said.
People in the industry say many institutional investors feel the same way, and that a lot of them have short positions on the stock. That may be why its up today. Now that a dividend cut isn't a threat, accounts are starting to cover their positions.
TD Securities and Morgan Stanley advised Yellow Media on the sale.