Sylvain Dumais
When a company is forced to restructure, you can often lay blame on many moving parts. Shifting industry landscape. Bad management. Silly business strategy.
But in some situations, the root problem is crystal clear: piling on too much debt. It happened to CanWest Global Communications Corp., and it happened to Yellow Media. Both were giants of their industries until they suddenly crumbled under crushing debt burdens.
Yellow Media struck some major acquisitions through the years, including Advertising Directory Solutions Holdings, which published directories under the SuperPages brand name, for $2.55-billion in cash. To pay for the deal, it opened up a $3-billion credit facility. It also scooped up Trader Media assets in a few separate deals that amounted to $1.2-billion.
But then the industry took a turn for the worse. Who needs a phone book when you can Google a company's phone number?
Some might argue there's nothing Marc Tellier, Yellow Media's former chief executive officer who left the company Thursday, could do about this. There's some truth to that. The journalism industry, for one, has been disrupted by the Internet, too.
However, had Yellow Media been more debt-averse, it would have had time to re-tool its business strategy. Remember that when the company reworked its capital structure last year, its cash flows were still relatively strong – so strong that some shareholders argued the debtholders were forcing a restructuring simply to get a better stake in Yellow Media.
Yet the cash flows could only withstand so much debt, which started to become a major problem in early 2011. At that time, rating agency Standard & Poor's warned that the company needed to lower its burden by $450-million, bringing its debt to about 3.2 times its earnings before interest, taxes, depreciation and amortization, or risk losing its investment grade rating.
Mr. Tellier initially brushed off the worries, but ultimately sold off the Trader Corp. assets exactly two years ago this month. After buying them for a total of $1.2-billion, Mr. Tellier unloaded them to London-based private equity firm Apax Partners for $745-million.
At the time he tried to argue that the deal was favourable because the sale garnered an attractive multiple to the company's earnings – but that's only because the earnings dropped from the time of the original purchases.
From there it was all downhill. The Trader Corp. assets were prized possessions and without them the company ultimately slashed its distribution, despite promising many retail investors it would never do so. Then came the restructuring when Yellow Media was still dealing with a $1.8-billion debt burden.
What happened here is a reminder for CEOs in every industry: leverage isn't always so sexy over the long-term.
(Tim Kiladze is a Globe and Mail Reporter.)
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Tim Kiladze