You have to wonder what the Yellow Media brain trust was looking at when they glanced up from their iPads and noticed what the rest of the world had long figured out. Were they checking the weather? Reading Chicken Soup for the Obsolete? Or searching Yahoo for a florist and marvelling at the convenience of the Internet?
Whatever it was, writing down the books by $3-billion and eliminating the common-share dividend was almost like shutting the barn door after all the horses had escaped. I say almost because, amazingly, the company still had its believers, given the fact that the stock plummeted when the dividend was finally eliminated. It seems some poor souls thought the 25-per-cent yield was solid or that the dividend might only be cut. Some of the horses didn't get out. And they say dividends make investments safer.
The question now is whether there's any value left in the business. Some will be tempted to see it as a penny stock with a shot at a quick gain, the option theory that says your downside is relatively small but the upside could be big. After all, the company has more than $1-billion of annual revenues.
I think the stock is a zero. I've been saying that for a long time but I don't see it as any more of a buy at 28 cents than it was at $15.
My analysis is pretty sophisticated: I don't know anyone who uses the company's services, old or new, and I don't think this well-paid management team has the skills to fix the problem. That's not intended as a slight; who could fix it? The digital domain is no country for old men, especially financially hobbled old men.
Yellow Media had, until yesterday's announcement, intangible assets of $1.7-billion and goodwill of almost $6-billion. The intangibles would be trademarks, brand names, customer contracts, etc. The goodwill would be the excess over fair value paid for other companies. By writing that down the company is admitting that it massively overpaid. That's no surprise: Yellow Media paid $1.2-billion for Trader Corp. and sold it for half-a-billion less.
The company's stated book value was $5-billion before the writedown. The market value was one-tenth of that, so it's clear that the board was just catching up with the stock market. Even now the book value will be substantially higher than the market capitalization. Investors are saying the books still overstate the company's real-world value by a long shot.
The lenders aren't fooled either, and they are starting to take control by cutting the company's credit lines in half and demanding repayment of $100-million a year on the drawn credit. The dividend cut will save the company $75-million a year. Which implies less money to invest in the digital business. Meanwhile, the print business is evaporating at an accelerating rate.
So to sum up, Yellow Media's traditional business is withering and will never come back, it's run by people who can't value an acquisition, the vague business "plan" is to break into digital somehow (real estate listings? Really?) despite increasingly limited resources and formidable competition from Google and others, and the lenders are asserting themselves to the detriment of shareholders.
Option anyone? The downside on such a bet is a very possible 100 per cent. The upside should be the potential for a big gain. I don't see it at Yellow Media; I see a zero.
You don't have to agree; after all, when Air Canada went bankrupt, the stock traded and often rose sharply even though the company went out of its way to tell investors the common stock was worthless.
It never actually went to zero. It just got delisted and – to borrow the parlance of option traders – expired worthless.
Fabrice Taylor publishes The President's Club investment newsletter, focusing on off-the-radar small to mid-cap companies trading at a discount to net asset value. His letter and The Globe and Mail have a distribution agreement. He can be reached at fabrice.taylor@gmail.com.