Let's dig into the SEC filings because you have to look at the filings from both companies to see what is going on. Here is SuperMedia's. Here is Dex One's. First thing is that the date of the merger has been extended past December 31, 2012 to June 30, 2013. This takes us to the middle of next year.
Chapter 11 Notes
Neither Dex One nor SuperMedia has at this time taken any action to approve any bankruptcy filing or effect any restructuring under chapter 11 of the U.S. bankruptcy code, and neither party has any obligation to commence any Chapter 11 Cases.
SuperMedia Support and Limited Waiver Agreement
On December 5, 2012, SuperMedia and its subsidiaries named therein, certain lenders under SuperMedia's credit facility and JP Morgan Chase Bank, N.A, as the administrative agent under SuperMedia's credit facility, entered into a Support and Limited Waiver Agreement (the " Support Agreement "). As of the date of the Support Agreement, the lenders party to the Support Agreement held approximately 29% of the principal amount currently outstanding under SuperMedia's credit facility.
Dex One Support and Limited Waiver Agreement
On December 5, 2012, Dex One and its subsidiaries entered into a Support and Limited Waiver Agreement (the " Support Agreement ") with certain lenders under Dex One's senior secured credit facilities (the " Credit Facilities ") and JP Morgan Chase Bank, N.A and Deutsche Bank Trust Company Americas, as the administrative agents and collateral agents under such facilities (the " Administrative Agents "). As of the effective date of the Support Agreement, the lenders party thereto held approximately 41% of the outstanding aggregated principal amount under the Dex Media East, Inc. credit facility, 63% of the outstanding aggregated principal amount under the Dex Media West, Inc. credit facility, and 35% of the outstanding aggregated principal amount under the R.H. Donnelley Inc. credit facility.
Limited Waiver Agreement Notes
These agreements more or less line up a pre-packaged Chapter 11. There is a hard stop the night of December 16, 2012 by which both Dex One and SuperMedia owe their financing amendments to all the lenders party to the Support Agreements. Scroll to the bottom of their SEC filings and take a peek at the Lender Discussion Material Transaction Update as of December 6, 2012.
Things of Note from The Lender Discussion Material
The interest rates have gone up. The Annual Amortization payments have gone up. The Net Revenue is expected to stabilize around the end of 2015 due to print declines being offset from digital revenue growth. When the revenue stabilizes in 2016, the DEBT/EBITDA is forecasted to come in at 2.2x. This ignores any savings coming from sub-par debt repurchases which could be substantial considering that the company starts with around $200M and the cash projected to be provided for this purpose is over $75M for 2013 and then over $125M for each year thereafter. This amounts to 20-30% of their combed pro-forma FCF. If their declines are slower than forecast or they pay off their debt at a discount as I figure that they will, the DEBT/EBITDA coming into 2016 should be less than 2.0x on a company that has $2B of revenue that has stabilized, $719M of EBITDA that has stabilized, and over $412M of FCF at which point they can probably lock in lower interest rates to increase FCF to over $450M. The merged entity could be debt free within 4 years at that point.
(click to enlarge)
100 To 1 In The Stock Market
In this book by Thomas Phelps, we learn that there are a few kinds of ways to make 100x your money on an investment in the stock market. My favorite kind that are the easiest to spot are leverage situations. In these situations, the market value of the equity is trading at a small fraction of the market value of the debt. Generally, these situations happen during times of crisis. Generally, when the debt of companies trades at a discount to par, you will see the companies recapitalize where the equity turns worthless and new equity is issued to creditors and the debt is written down to market.
That said, from time to time, you will find leverage situations that companies with strong managements can work themselves out of. In the case of Dex One (NYSE: DEXO) and Supermedia (NYSE: SPMD), I think that this is one such situation. Right now, the equity is trading at a market capitalization to free cash flow ratio of less than 0.15. I would argue that during times of less distress and confusion, this should be north of 4 assuming that the credit markets allow refinancing in 2016. Being pessimistic, $400M of FCF * 4 means that the equity is worth at least $1.6B in 2016. Right now the equity of the merged company is trading less than $100M. It seems like the only question left to ask is: "Is that enough upside for you in 4 years?" Note that it compounds out to about 100% a year for that time frame.
It seems that everyone likes to play the question game with me. Yes, this is a phone book company. Yes, people don't rely on phone books as much as they used to. Yes, revenues are in decline. Yes, the price of their debt indicates that their creditors lack faith in their future profitability levels being able to meet their credit obligations. Yes, I understand that you throw your phone book away immediately after you get it or perhaps you put it directly into the recycling bin.
It's My House
Ok, enough of your questions. No. You don't own it. Perhaps you should. I do. I am 100% invested into directories businesses. These two and this merger is my favorite investment of 2012 and the foreseeable future. My favorite was Yellow Media, but their management is getting taken advantage of by a time of crisis as opposed to taking advantage of a time of crisis like Dex One and SuperMedia are doing. Although I have not sold a share of any directories business in the last year and have only been on an acquisition spree until all I owned was these three phone book companies, in the next 3 months I intend to sell a portion of my Yellow Media position and allocate that cash into Dex One and SuperMedia. I want to take my position in Dex One and SuperMedia to over 50% of my portfolio.
I can only hope that the price of equity stays low in light of the approval from the creditors. Did I mention that there is a huge short position in both SuperMedia and Dex One? I am starting to feel bad for those guys as I believe that their days are numbered.
Disclosure: I am long DEXO, SPMD.