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Sylvain Dumais

Aimee Davison is showing off her latest work of art, a mouldy pile of paper that makes a pointed message. In the middle of her kitchen sits "Yellow Page Mountain," assembled from 191 unwanted Yellow Pages directories that she gathered from the streets of Montreal in a seven-hour period.

It's the second such work she's made. About a year ago, Davison and a friend collected more than 500 Yellow Pages volumes. They rented a U-Haul, unloaded the pile in front of Yellow Media Inc.'s headquarters, and filmed it for YouTube. Minor Internet fame ensued.

"I got such a strong response the first time, but the problem's still there," Davison says. "There are so many out there that people aren't using, just littering the streets. It's a waste."

If Yellow Media is as doomed as this fall's plummet in its share price suggests—the stock that once hit $17 was trading at 17 cents in early October—then there's no better metaphor for its fate than the mould growing on products it simply cannot give away.

The evidence is peppered around the streets of Montreal, just across the river from the headquarters of Yellow Media, the publisher of the Yellow Pages and Canpages directories across Canada. As Davison points out on a neighbourhood tour, moist and blackening Yellow Pages are everywhere—on stoops and in doorways and apartment hallways, or kicked halfway under patios.

Yellow Media CEO Marc Tellier would like nothing better than to distance his brand from this image of decay. While he spent years boasting that his advertising books were as healthy a business as ever in the online age, now he bemoans the fact that people aren't aware Yellow makes more than the Pages. "One of our communication challenges is that people ubiquitously recognize our walking fingers trademark, and it's almost automatic that they think of the print," Tellier says.

Yellow Media's stock lost more than 97% of its value between the start of the year and early October; many observers believe it is headed to zero. The company's debt (and there's plenty of it) has been downgraded to junk status. The banks that lent to Yellow Media have begun to demand their money back. In September, the company fired its chief financial officer.

It's evident to anyone not living in a cave that Yellow Pages could not dominate the age of Google as it dominated the age of the rotary phone. But is this sudden about-face regarding the value of a long-profitable company really rational? And whether it's rational or not, why did the Yellow rebellion—which may not be over—come to a head so quickly?


The Yellow Pages brand has been in consumers' homes ever since the books included instructions on how to use a telephone, and "Corsets" and "Snuff" were among the category headings. Small and medium-sized businesses in particular have seen a spot in the books as a must. And for good reason: There was, in fact, no other handy way for consumers to find local suppliers of goods and services. The Yellow Pages became so fat with ads that in 1961, after 52 years in print, then-publisher Bell Canada had to split the Toronto book in two because it had grown to an unwieldy 1,800 pages.

When Marc Tellier took over the business in 2002, it was still under Bell ownership. He had every reason to be confident about the future. The 33-year-old had quickly climbed the corporate ranks at Bell, and had been named one of Canada's "Top 40 Under 40" young achievers. That he is the son of Paul Tellier, lionized in corporate circles for his successful privatization of CN, can't have hurt. But the younger Tellier enjoyed glittering press in his own right, adding further lustre to the family name.

At the time, businesses that enjoyed a steady, almost utility-like income, without the burden of major capital and technological expenses, were deemed ripe for conversion into income trusts. If profit didn't need to be plowed back into the business, it could be paid out to investors as distributions.

With Tellier at the helm of the division, Bell sold Yellow Pages to Kohlberg Kravis Roberts & Co. and the Ontario Teachers' Pension Plan Board in 2002 in a $3-billion deal. An income trust IPO followed in 2003. Investors were hungry to hold units in the newly christened Yellow Pages Group, and the IPO became the richest ever for an income trust. The company rewarded unitholders with a rich distribution that was hiked as earnings rose.

Tellier, however, was not satisfied with Yellow Pages' market position; he wanted national dominance, which meant acquiring SuperPages. Just as Yellow was originally part of Bell, SuperPages was once Telus's directory. In 2001, the business was sold for $810 million to Verizon Communications Inc., which in turn sold it to Boston-based private equity firm Bain Capital LLC for a hair less than $2 billion in September, 2004. Less than six months later, Bain sold the business to Yellow Media for $2.55 billion, giving Tellier his national reach.

The deal, doubling the size of the company and realizing sizable cost savings, was hailed as a master stroke by the young executive. Yes, debt was growing, but neither the management team nor the market were much concerned, given the company's rapid rate of growth.

But hidden within that deal was the company's first misstep.

Even if the debt didn't appear to be a problem, Yellow Pages had secured a geographic monopoly at a time when the Internet was rapidly making its business borderless. Tellier had bought himself dominance over an industry in decline. In only a few years, it would seem quaint to flip pages to find the right category in an oversized tome when one could turn to the Internet—where search engines like Google pop out locations, hours of operation and telephone numbers in 0.12 seconds, and niche sites and Facebook friends can offer the added value of customer reviews.

The pyrrhic victory of SuperPages was sealed with a string of acquisitions in the following years as Yellow cemented its dominance, buying directory publishers from coast to coast. Yellow Pages also made a series of buys in the following years to create its Trader unit, and expand into the print and online classified ad business. Tellier was just getting started, and he seemed to be making all the right moves. By 2006, a column in The Globe and Mail called him the most "fawned-over CEO in Canada today."


It's not as if Tellier doesn't take the Internet seriously. He has long argued that Yellow Pages can replicate its hard-copy success online, and that is its priority—building a network of websites, mobile products and search engine marketing services. The CEO reminds anyone who will listen that he is building an Internet company.

He does have his believers. "Marc is a winner. ...They really have an Internet focus internally," says Sebastien Provencher, who was formerly head of online business development and strategy at Yellow Pages. "Maybe they're not doing a great job selling their own success. They've done more for Canadian small business online in the last 10 years than anyone else."

In the past 18 months, Yellow Pages has made the most aggressive introduction of digital products in its history. It now offers a search engine optimization service, which helps customers' listings push to the top of results on Google, Yahoo and Bing. Yellow has expanded its client base by targeting national advertisers in a way it never did before, landing the likes of Sears and Walmart. It is more actively selling its advertisers on the Yellow Pages application for mobile devices, which has scored 2.5 million downloads. And it has begun building websites for small businesses, selling 10,000 of them in the first six months of the effort. Digital revenues have grown from 14% of overall revenues to just over 25% in three years, and Tellier says he wants to see that percentage grow much further.

For all that, Tellier's attachment to the books lasted longer than it should have. As recently as two years ago, in the midst of an economic downturn that decimated advertising budgets and forced a day of reckoning for other largely advertising-dependent print businesses such as newspapers and magazines, Tellier was bullish on the directories, claiming that even the younger generation used them to find their tattoo parlours and sushi restaurants. Instead of conveying the confidence that behooves a CEO, his claims made him seem out of touch.

"There are times in the past where we've lacked credibility by putting emphasis on the print, and by saying the print was more robust than people were giving us credit for," Tellier says now. "Have we found the recipe quite yet in terms of offsetting the print erosion by selling all of these online products? Obviously the answer is no, because if we had, we would have reacquired growth and we haven't. But we do remain cautiously optimistic at the early signs of our success."

While his online competitors may be giants such as Google, Tellier claims he has a secret weapon: trust. Yellow Media's bread and butter is still small business owners, many of whom are at a loss when it comes to arcane aspects of online advertising such as bidding on Google keywords. While many advertisers are realizing that Yellow's books may no longer be the best place for their ads, that doesn't mean they've soured on the company entirely. This is where its sales force comes in—a network of representatives that have established relationships with customers, something Google lacks. "Businesses would prefer to have a single point of contact to demystify this digital universe," Tellier says. "We think the market dynamic is in our favour."

Rose Samson is the kind of customer Tellier is banking on. She is one of the owners of Hair Solutions beauty salon in St. John's; she's been a Yellow Pages customer for about 35 years. This year, she cut down on her print spending slightly. But when it came to building an online presence, she turned to the company she knew.

"We compiled the information and they put it together," Samson says. "We're a small business, and getting Yellow Pages to do it for us was very helpful. Word of mouth is the best advertising money can buy, and it's free. But aside from that, we've been going with the Yellow Pages." This year, she'll still be spending $800 to $1,000 per month in advertising—between print and digital—with Yellow.

But converting existing clients to digital ones won't be enough to keep Yellow Media afloat. It needs new customers, who may be harder to persuade.

In June, a Yellow Pages sales rep walked into Pizzeria Bellechasse, an unassuming joint that is one of the last holdouts of Montreal's 99-cent slice. In the 20 years since Tony Lucadamo's father opened the place, the business had never had an ad in the Yellow Pages. And now the rep did not even bother trying to sell Lucadamo a print ad. Instead, he offered to build a website. "They go, 'This is what it is now, people don't use the books, they're online, on their phone,'" Lucadamo recounts as he kneads dough.

Working 10-hour days behind the counter, not to mention management duties, Lucadamo couldn't also manage a Web presence. He decided to pay Yellow to do it for him—$150 per month. For that price, the package included photos, videos and a virtual menu.

But when Lucadamo logged on to see what he'd paid for, he found only a basic page displaying his place's name, address and phone number. When he tried to fix the problem, he could not reach his rep. Instead, he sat on hold and was routed to what sounded like an overseas call centre. The customer service process was so frustrating that he cancelled his account in late August. He had gone from being a new-style Yellow Media customer to a fed-up former customer in less than three months.

Lucadamo is now planning to have his nephew build a new site for him—the young man offered after overhearing our conversation while enjoying some of the house poutine. The pizzeria will save its marketing budget for other uses. "It's a lot of word of mouth, the pizza's good, it's a small neighbourhood," Lucadamo says, turning to greet a customer by name and inquire about his bronchitis.

Not everyone has a Web-savvy nephew. Most freelance Web designers charge a onetime fee, typically a couple thousand dollars, for getting a site up and running. Yellow Media's monthly fee for keeping a website online can quickly add up to much more. Former Yellow Pages customer Michael Gregg, who owns an IT consultancy in Edmonton called Catalyst Network Solutions, objects to the pricing scheme. "They're going to own your website, and you're going to pay them for it—that is just holding you over a barrel," he says. "They're going to build your corporate presence for you, but that's a huge trap to get into. How do I get my website off Yellow Pages? You can't. There's no export policy. What a rip-off."

Before he cancelled his account with Yellow Pages in late 2009, Gregg was paying up to $18,000 per year for a quarter-page ad in the book. But he says his customers rarely found him that way. As for digital, that amounted to letting Yellow Pages resell him Google Adwords.

He decided to go direct. It took him a while to learn his way around Google's advertising, but he now pays $10,000 per year for all the times people click on his sponsored search results—far less than he would have paid with Yellow Pages.

Yellow Media claims to be "Canada's #1 Internet Company," but the boast confuses its legacy business with its future business, where geography means little. "Everyone uses Google, uses Bing, uses Yahoo. It doesn't matter where you're located," Gregg says. "I don't care if you're number one in Canada."


For all its problems, Yellow Media remains a business that generates a sizable amount of cash. The company has a basic operating margin of about 50%. Even in the second quarter of this year, while its net results were pushed to a loss because of a $50-million writedown in a money-losing investment, its EBITDA (earnings before interest, taxes, depreciation and amortization) was a fat $176 million on revenue of $343 million. Annual revenue for the past several years has been stable at about $1.6 billion.

A successful business doesn't die overnight. But one incident can make a chronic illness dramatically flare up. With Yellow Pages' client list steadily bleeding away, a weakening of earnings in the first half of this year was enough to make Tellier's acquisition spending spree finally come back to haunt him.

The burden showed up in substantial numbers on the balance sheet, as the company carried $2.5 billion in debt it seemed in no hurry to address. And this while the market's tolerance for debt exposure in a highly vulnerable print media player was fading fast.

"Print media companies are constantly having [the value of their business] re-evaluated. If your debt levels are even at 2.5 to three times EBITDA, the exposure of the stock is just magnified," says Canaccord Genuity analyst Aravinda Galappatthige. Companies with a large debt load see the value of their equity contract faster as the market questions the future of their business. That's part of what drove Yellow's stock down. It didn't help that short sellers, who bet on a stock's price going down, were active in Yellow this year.

The heft of the debt turned off even faithful investors like Calgary-based Bissett Investment Management, which had held shares in Yellow from the time of its IPO. By the end of 2010, just before the stock's precipitous decline commenced, the fund had decided to sell. "It's not really an operational problem at Yellow Pages. It's not perfect, but it's fine," Bissett senior vice-president Leslie Lundquist says. "The real problem comes from how the balance sheet has been managed."

Tellier and his chief financial officer, Christian Paupe, were criticized for taking little action as those concerns mounted. In 2009, the company had debt of $2.5 billion. At the beginning of this summer, the load had barely budged, at $2.4 billion.

Then, in March, Yellow Media sold the auto listings segment of the Trader unit for $708 million, taking a nearly $400-million loss. Even if the sale sounded like a strategic defeat, analysts largely said it was the right move, since Yellow Media needed the cash to pay down debt.

Instead, the company moved to bolster its stock. It introduced a share buyback program, spending its cash on common and preferred shares. This was not the signal Bay Street wanted to receive. First of all, some of those preferreds were coming up on a deadline that would have allowed Yellow to convert them cheaply into common stock. So the company wasted cash on subordinate debt that would normally be last in line to be paid back—and that could have been exchanged for devalued stock. Second, Yellow missed an opportunity to retire more pressing debt. While the company did pay down $238 million in senior bonds during the summer, observers said Yellow should have done much more, especially since that debt was trading at distressed levels and the company had the cash to pay it down on the cheap.

"It didn't handle its senior debt.... This will go down as one of the greatest blunders a board, management team, CFO, have made in Canada," declares Paul Tepsich, the founder of High Rock Capital Management, which has owned Yellow Media senior unsecured bonds in the past. "Selling a valuable asset, Trader, at [a price equal to]10 times EBITDA, that should have been a credit-changing event for the positive, turned into a credit-changing event for the negative and imploded all of the capital structure."

There was more grief to come. In August, Yellow said that in November it would take a $2.9-billion goodwill writedown, reflecting that the "fair market value" of its assets has significantly declined. More crucially, the company posted a loss, and had its debt downgraded to junk status by Standard & Poor's (DBRS followed with the same call in September). The stock slide accelerated further. Within 35 days, the company fired Paupe, the CFO.

It was a stunning decline for a company that had made its name paying out stable distributions. After the company became Yellow Media last year following its conversion from an income trust to a corporate structure, it attempted to hold on to this heritage by continuing to pay a dividend—though it was down slightly, to 65 cents.

But this only compounded the problem. Given the downward trends involved in the switch to digital platforms, the calls mounted for Yellow to eliminate its dividend entirely— it wasn't sustainable.

After its downgrade in August, Yellow cut its dividend to 15 cents to save money for debt payments. But it wasn't enough. Yellow had a credit facility with its banks that included a covenant preventing the company from paying a dividend of that size if its debt was not investment grade. The downgrade triggered those conditions, and the banks came calling. "It was like they intentionally violated the credit agreement. I don't know why," Tepsich says.

The banks demanded $500 million of their money back, and a further $25 million every three months. Yellow finally cut the dividend to zero. The squeeze from the banks, plus the money paid back on its medium-term notes over the summer, means Yellow Media's debt is now sitting at $1.8 billion. The Trader proceeds are gone, and management no longer has as large a credit facility to draw on; that constricts the company's access to cash, especially come 2013, when its bonds begin to mature and must be paid back as well. "After 2013, it gets tight, cash-flow-wise," Galappatthige says. "Now it's a question of long-term solvency."

Until this year, Tellier's position was that the naysayers simply didn't understand the inherent value in his company. His frustration has been transparent on conference calls as he tries to sell his transformation story to analysts who have mostly tuned him out.

But after Yellow announced the new, more stringent credit agreement with the banks in late September, Tellier admitted the prospects for the company's transition—whether digital businesses will be able to compensate for declining print revenues—are far from certain. The same might be said of his tenure as CEO.


Tellier says Yellow Media has now demonstrated its commitment to reducing debt, and wants the conversation to shift. "What has been frustrating this year, is there has been so much focus on debt and short selling, and 'Will we meet financial obligations?' and so on; it would be great for someone to step back and appreciate that this business is in transformation," he says.

Yellow Media still counts 354,000 advertisers in its client base, but even with its digital solutions, that number has been eroding steadily; two years ago it was at 405,000.

Tellier points out that his company has been quicker to build its digital presence than others in the print media. Many newspaper companies have only managed to reach 10% of their revenues from digital businesses—though The New York Times sits just ahead of where Yellow is, with 28%. "Am I proud of the fact that on an annualized basis we generate around $345 million of revenue online? Yes. That was $8 million the first year I was here," he says. "Our progression has been good. The question is, has it been good enough and fast enough? Clearly we're not where we need to be. But we're not a market laggard either."

But as the perception of Yellow Media's value dwindles to nearly zero, Tellier is now in a race to change the story. Despite its historically huge profit margin, its powerful brand and street-level connection to its customers, Yellow Media was bound to hit some potholes transforming itself for the digital era. What its management didn't need to do was to turn potholes into sinkholes by acting as though the sheer size of the print business meant that its debt would never catch up with it.

If Tellier is to prove that the business is not indeed worth zero, he'll need to manage Yellow Media's finances more adroitly than he has this year. Otherwise, the company's fortunes, like Aimee Davison's Yellow Pages Mountain, will eventually be relegated to the recycling bin.

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