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Calls mount for Yellow Media to cut dividend

February 3, 2006-- Workers pass by a Yellow Pages reference room in their Montreal offices on February 3, 2006. For Business. Globe and Mail/Christinne Muschi

Christinne Muschi/Christinne Muschi/THE GLOBE AND

For Yellow Media Inc. investors, things are going from bad to worse.

Already under attack from short sellers, the company's battered stock suffered its biggest percentage drop in nearly five years Monday after two analysts slashed their price targets and calls grew louder for the company to cut its dividend to shore up its capital structure.

In a note titled "Raising a Yellow Flag," Credit Suisse analyst Colin Moore downgraded the shares to "underperform" from "neutral" and drastically lowered his 12-month target to $2 from $5, citing "accelerating" declines in Yellow Media's print directory business.

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In Edmonton, for example, the number of advertising pages in Yellow Media's most recent book plunged 14 per cent from a year earlier, compared with drops of 12 per cent and 3 per cent, respectively, in the previous two years. Print directories in several other urban markets he studied are also shrinking at double-digit rates, and the company's online business isn't growing fast enough to make up for the declines.

The "financial results are at risk of becoming increasingly unpredictable, given weakening print trends," he wrote.

The growing uncertainty was too much for many investors on Monday, as the shares skidded 55 cents, or 18.4 per cent, to close at $2.44 on the Toronto Stock Exchange. The shares are down 61 per cent so far in 2011.

Yellow Media declined comment.

Short sellers have been hammering away at the shares at a time of growing uncertainty for the company as it tries to make the transition from print to digital media and sell off assets to reduce debt. Seeking to quell market rumours, the company issued a statement late last month stressing that the proposed $745-million sale of its Trader Corp. unit is proceeding as planned and reaffirming its dividend policy on common shares.

Selling Trader would allow Yellow Media to put a dent in its $2.1-billion debt load, giving the company breathing room with credit rating agencies who might otherwise see fit to cut its debt to junk levels. A ratings cut could trigger stricter loan covenants that would likely force the company to reduce its common-share dividend.

But cutting the dividend and using the proceeds to reduce debt is precisely what Yellow Media should do, some analysts and investors say. Indeed, the current dividend yield of 26.6 per cent signals that the market fully expects a hefty dividend cut, perhaps imminently.

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"We believe investors want to see a 'de-risking' of the story with respect to debt repayment and levels of [free cash flow]available after dividends," analyst Drew McReynolds of RBC Dominion Securities said in a weekend note to clients, in which he cut his price target to $3.75 from $5.

"We believe a more conservative capital structure and [dividend]payout policy that provides greater financial flexibility and more certainty during the business transformation would go a long way toward achieving this end and 'reflating' both equity and debt values."

For his part, Mr. Moore said Yellow Media "may have to consider cutting the dividend in half to ensure they can continue to deleverage over the mid-term." However, others say the company should eliminate its dividend entirely and use the roughly $350-million in annual savings - plus proceeds from the Trader divestiture - to retire debt.

"It's ridiculous that they are paying a dividend given the leverage in the business," said Paul Tepsich, chief executive officer of High Rock Capital Management and a Yellow Media debt holder. The quickest way to make short sellers go away and put the company back on firmer footing is to make a full commitment to reduce the leverage on the balance sheet, he said.

"They have a glorious opportunity to do the right thing and right-size their capital structure … and come out of this stronger."

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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