It appears that when George J. Schultze of Schultze Asset Management has an opinion, you should listen to it. Since I've been covering the triple threat of Yellow Pages companies in North America, I figured I'd opine on the latest news that Dex One (DEXO) and SuperMedia (SPMD) are planning to combine into one new entity -- Dex Media. The overview of the new entity can be found here. The best press release to look at is here.
Let's get started, shall we?
Upon closing of the transaction, Dex One shareholders are expected to own approximately 60 percent and SuperMedia shareholders are expected to own approximately 40 percent of the combined company.
Dex One Wins!
First thing's first. Dex One management proves that they are better negotiators than SuperMedia. Dex One's Net Debt/EBITDA is significantly higher, and they negotiated for more of the post merger company. Hilarious! This only confirms my suspicions that Dex One has had the best management of the three.
In theory, you would have seen a fair share-for-share exchange, whereby they valued the suggested (Market Value + Debt)/EBITDA ratios, and would have noticed that Dex One is not more expensive than SuperMedia. It's actually more in trouble. I say that it is more in trouble because the debt is trading at a discount to par, and their ability to pay it down is proportionally inferior to SuperMedia.
High Five to Dex One management.
Regardless of who got the better end of the deal, the deal as it sits is a win/win. The upside gives me nosebleeds. The merger makes the probability greater that the companies will achieve. Thus, I am a very happy camper. There is strength in numbers in this case. The bigger, the better.
Dex Media - The Future
As of close Tuesday, the adjusted price post share exchange for the newly trading company comes in at around $8.15-$8.29, depending on which stock you use to do the conversion.
The Debt/EBITDA of the new company comes in at 3.46.
Since the equity is still being valued at less than $140M, the upside for the company that makes over $600M in free cash flow per year is tremendous!
If you extrapolate the situation out a few years, you'll have the company close out debt at sub-par prices, and eventually be kicking out over $25 per share of free cash flow, even after print declines.
Is that worth $8 today? You betcha. I figure that by the end of 2015, this will be trading over $200 per post-merger share, something that, if you buy today, will result in a 25x return.
This is the easiest money on earth.
Another Merger Possibility
While these companies are going to totally stomp all over and completely destroy market averages into the foreseeable future, wouldn't it be awesome if they could be even more effective?
There's one company that comes to mind that has management that is presently trying to give away the company for free, with far better multiples than Dex One, SuperMedia, or the merged Dex Media. This company is called Yellow Media (YLWPF.PK).
Why take over just the United States when you can take over all of North America?
The Devil's In The Details
The way Dex Media would be best served in this steamrolling acquisition/merger would be to send the Dex One management team into meet with Yellow Media and set up a similar share exchange.
I bet Dex One management could do it for a 125-1 new share issuance to acquire all of the assets and liabilities of Yellow Media. The net result would be:
- A company with 20.8M shares outstanding
- A lower Debt/EBITDA ratio
- A higher Cash/Share rato
- And superior Cash Flow and EBITDA on a Enterprise Value basis
The good news is that Yellow Media just tried to sell 82.5% of its business for practically nothing to its creditors, so its management would love to take a low-ball offer from some practical negotiators.
A More Prosperous Future - Congratulations!
I wanted to congratulate both SuperMedia and Dex One for both having the brains and the balls to pull this off. Good job. You guys are awesome. Now, if you don't mind, please go take advantage of your bumbling neighbor's irresponsible management. You have proven that you can put its cash to better debt retirement uses than it can.
Additional disclosure: I also own all classes of preferreds for Yellow Media, and represent other minority Yellow Media shareholders. I bought more Dex One and SuperMedia today.