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The turnaround at Yellow Pages is fizzling

The Yellow Media Inc. logo is shown at the company's quarterly results meeting in Montreal, Thursday, May 6, 2010.


The turnaround of Yellow Pages Ltd. in Canada is showing signs of fizzling.

Less than five years after its restructuring, and in the middle of a high-yield bond surge, the company's debt is the worst-performing among peers as it struggles to transition from a phone book distributor to a digital advertising platform.

The Verdun, Quebec-based company's 2018 bonds have lost 0.25 per cent this year through March 15, the only negative total return on an index of Canadian high-yield bonds that has rallied 2.7 per cent. Yellow Pages reported earnings last month that were below analysts' expectations and it took a $600-million writedown.

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Yellow Pages, synonymous with the thick phone book once widely delivered to Canadian homes, faces similar structural problems as other media companies: digital sales aren't growing fast enough to replace rapidly dwindling print revenue. Sales of $818-million last year were half the total in 2009. The company will release a new strategic plan in May.

"The company's plan was always to return to growth" in revenue and profit in 2018, Vahan Ajamian, a research analyst at Toronto-based Beacon Securities Ltd., said by phone. "That's been kind of derailed it appears with the recent developments."


The earnings stumble comes more than three years after Julien Billot was appointed chief executive officer with a digital-first focus. Yellow Pages went through a restructuring in 2012 to wipe out $1.5-billion of debt and announced its return to growth plan in 2014, Ajamian said.

The 2018 bonds, which would be first in line for the roughly $75-million in debt repayment the company said it could do this year, are trading around 101 cents, data compiled by Bloomberg show.

"A cloudier outlook for the digital business could hinder efforts near-term on a recapitalization of the balance sheet, specifically alternative financing to retire the costly and covenant-heavy senior secured notes" due in 2018, RBC Capital Markets analyst Andrew Calder wrote in a note after earnings.

The company's May 31 call date on its 2018 debt is key because it will be able to redeem the debt at 100 cents on the dollar as opposed to 105 currently, Ajamian said. The bonds are currently trading above the 100 cent call price.

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"We are conscious that we're seeing margin pressures in the business and have been able to identify the causes and are working to address this," Yellow Pages spokeswoman Fiona Story said in an email.


Story pointed to some of the "important successes" the company has had since the launch of its 2014 growth plan, including adding 41,100 new digital customers last year as well as an expanded digital product offering. The company has repaid $490.3-million on its senior secured debt since December 2012, with net debt sitting at $384.9-million at Dec. 31, she said.

Top holders of Yellow Pages equity, which include Canso Investment Counsel Ltd. and hedge fund Goldentree Asset Management, have also struggled. The stock has plunged 55 per cent this year to around $8 in Toronto, for a market value of about $225-million.

"It's definitely going to be a challenging two months," Ajamian said. "They're going to have to regain credibility in the marketplace."

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