2012 - The Year of The Directories Business
Dex Media (DEXO) will succeed in refinancing debt and has thunderous upside leveraged at 3.0x. Hibu Plc is caving and the equity isn't a buy as it is way too indebted (4.7x). PagesJaunes is in the process of extending debt repayments and is presently leveraged at 3.66x. Yellow Media, the least leveraged of the bunch (2.7x), is pursuing the least shareholder friendly option of them all, effectively giving the company to creditors without a fight because the creditors asked for it.
Recently in the News
Yellow Pages publisher Hibu Plc, formerly Yell Group (YELGF.PK), has obtained the waivers it was seeking on some debt conditions. Although this sounds like good news, the company is heading for a restructuring instead of a refinancing, a debt for equity swap. This means that the equity is more or less worthless right now.
PagesJaunes is extending principle repayments and has targeted a leverage ratio of 3.0x before they can start paying out anything on the equity side. That's not too distant in the future from their present 3.66x considering their rate of revenue decline is very small. Upon a successful extension, PagesJaunes has over 100% upside, but the upside isn't even close to Dex Media's.
The implication of the PagesJaunes extension is that it even makes it more likely that the Dex Media merger between SuperMedia (SPMD) and Dex One (DEXO) will be a resounding success. The Hibu failure can be ignored because, in fact, they are too leveraged.
Lastly, since the announcement of the merger, both Dex One and SuperMedia's stock prices have held their gains since the merger announcement, further solidifying my predisposition and the market's predisposition to believe that the merger will be a success.
New to the Directories Business?
The directories business is fairly straight forward, but the investor uncertainty surrounding is not. What otherwise would be manageable debt loads has been resulting in high quality bonds being written down to junk status across the industry.
How Did Things Get Ugly?
SuperMedia, Dex One, Yellow Media, Hibu and PagesJaunes were all planning on easily refinancing their debt and didn't really worry about actually being able to pay it as it came due. Bottom line, if you are running a company, it is irresponsible to structure your debt repayments in such a way that you require refinancing to not go into bankruptcy. Unsurprisingly, the lenders for these companies all decided to simultaneously lose faith in the industry's ability to produce cash sustainably and their debt profiles all were downgraded.
In better understanding the future of Dex Media, it helps to compare them to the non-merging companies and how their plan is playing out. Hibu doesn't really have a choice and is going to be forced under by its lenders, so we won't discuss it further. PagesJaunes is refinancing its debt, a huge win for shareholders. Yellow Media is working against its shareholders. The fact that PagesJaunes is able to pull this off should really make you enthusiastic about the future of Dex Media and the fact that Yellow Media is making terrible decisions should not deter you, because you can attribute it to bad management, something which Dex Media will not be plagued by.
Digesting The Recent Industry News
PagesJaunes is leveraged at 3.66x. The creditors believe that there is value there that can begun to be extracted on the equity side at 3.0x.
If you look at the combined entity Dex Media, you have a DEBT/EBITDA running around 3.0x. They are already doing better than PagesJaunes on a leverage basis. The refinancing is in the bag.
If you're a debt investor, this is the easiest money out there and you are locking in some incredible future returns. Here's one talking on Yellow Media (YLWPF.PK). In the video, Lorne Steinberg accurately points out that the company ended up here because they did a terrible job allocating capital by choosing to bu yback shares and pay dividends instead of pay down debt. When asked about bankruptcy, Lorne points out that over the next 12 months they will throw off in excess of $300M of free excess cash flow and is set to make over $0.50 per share across the next 12 months. Don't forget that at present the company should have over $400M of cash on hand. This is not a bankruptcy story according to Lorne. Further, Lorne believes that "this is a pretty good deal for bondholders." Extending Lorne's remarks, I personally believe that this is a GREAT deal for bondholders. It is such a good deal for bondholders that it is effectively a default on the company's equity obligations. What do you call a company's that will make $300M of free excess cash flow, has over $400M of cash on hand, and dilutes its ownership 82.5%? Poorly managed.
Across the phone book companies, there's no shortage of cash flow. The shortage is simply in investor dollars being allocated to owning a part of that cash flow. In situations like this, management matters because it is the ability of the management to negotiate that will enable your equity stake to survive and prosper going forward.
Expected News Between Now and Dex Media Merger Completion
Yellow Media's plan should be very concerning to owners of Dex Media. The proposed plan hands 82.5% of the company to creditors and their DEBT/EBITDA is 2.7x. Further illustration of the ridiculousness of management at Yellow Media is that they push Creditor Protection. Fortunately, the judge threw out their latest amendment that would have more readily enabled the company to file for bankruptcy.
 I am of the view that the proposed amendment is in violation of the two above noted conditions: the amendment is useless to the present arrangement process ...
 Although this scenario may show certain signs of creativity, or have some practical or money-saving effects for YMI, it is difficult to follow.
Further, if you look at the voting results in detail, you'll notice that the plan would have never passed in accordance with the way voting should be done where all stakeholders vote independently in accordance with their class. The company, working with MTNs, proposed a plan behind the backs of everyone else that virtually hands the company to them.
In theory, you'd expect management to serve as this representation but they have strategically made all of their stakeholders angry: common and preferred shareholders, banks, MTN owners, and especially the convertible debenture holders. Unfortunately, management is not one that seems to care. Why have they not entered discussions openly with the banks and MTNs like the banking syndicate has requested?
It's crazy when the banking syndicate comes out and is concerned that the company has too much cash and that the company's too profitable to restructure under such terrible terms. It's not the bank's job to fight for the equity holders, as they are a creditors, but that is exactly what they are doing. odds are that management is in it for the post restructuring lower priced stock options as well as the payments to them upon successful completion. $43M is up for grabs.
Where are the securities regulators when you need them? Again, these are Yellow Media problems that wouldn't be in existence with better management. I did my best to fight it but was unable to find enough support to call a meeting and call for new management. That's why I am taking a stand, today, and saying that Dex Media is more than a 10-bagger from where we sit.
Dex Media - Strongest Buy Rating
Buying Dex Media given the fact that PagesJaunes was able to extend their principle repayments is the largest no brainer that I've ever come across, especially since management works in the best interest of Dex Media's shareholders. I do not expect that creditors of SuperMedia and Dex One will use the terms provided by Yellow Media to force a restructuring on the Yellow Page businesses in the USA.
How To Get Involved in Dex Media
The safest way to buy into this situation is to buy shares of SuperMedia. If the merger falls through they are in a better financial position than Dex Media because independently SuperMedia's debt is lower in proportion to SuperMedia's earnings as discussed here.
Disclosure: I am long SPMD, DEXO, YLWPF.PK.
Additional disclosure: I have owned all of these companies except PagesJaunes on various exchanges. I am presently making markets in DEXO and SPMD as well as I have preferred shares in Yellow Media and represent a group of activist investors on behalf of Yellow Media. I recently liquidated my position in Hibu/Yell and have no plan to initiate a position there or in PagesJaunes. My plan is to continue to accumulate Dex One and SuperMedia upon merger completion and to ride out the Yellow Media situation against my better judgment due to management's relative incompetence.