Idearc: Big Surprise for Its Biggest Investor

Includes: IDARQ, RHDC
by: The Deal Economy

The largest shareholder of Yellow Pages publisher Idearc Inc. (IDAR.PK) has speed-dialed a response to the company's warning that it may be forced to file for bankruptcy. In a release, Jack Corwin says he was "shocked [Sunday] to find, buried in a 17-page press release announcing 2008 financial results, language that indicated Idearc Inc. would likely file for bankruptcy."

The investor, who holds 8.34% of Idearc shares according to Securities and Exchange Commission filings, says Idearc's $510 million in cash on hand at year-end 2008 would pay off enough debt to prevent a filing and that to not do so would breach the fiduciary duty of the company's board of directors to shareholders. Idearc, spun off by Verizon Communications Inc. (NYSE:VZ) in November 2006, has $123 million in principal payments due on debt in 2009.

Corwin alleges a filing could be part of a strategy to depress Idearc's value so as to capture future appreciation -- presumably by debtholders, who would be in line to swipe the Dallas company's equity in a bankruptcy.

"This comes at a time when all eyes are on corporate America to behave with the utmost fiduciary responsibility," he said. "Where alternatives may exist for companies to avoid bankruptcy, it is highly unusual for a corporation to choose the route of bankruptcy at the risk of damaging their business and harming their employees and other stakeholders."

Despite Corwin's perhaps justified strong reaction (though Idearc did highlight the restructuring on the second page of its earnings release), Idearc appears to be in the same bind as scores of other companies, with a large amount of debt and shrinking revenue. According to the company's 2008 Form 10-K, filed March 12, net income fell to $183 million in 2008 on $2.97 billion in operating revenue, down from $429 million in net income on $3.19 billion in revenue a year earlier. Idearc's total debt, meanwhile, increased to $9.27 billion on Dec. 31 from $9.02 billion a year earlier, and it maintains a shareholder deficit of more than $8 billion. In its 10-K, Idearc lists all the debt as current maturities because of potential default related to the delivery to its lenders of a going concern warning. The company also says it could violate a leverage ratio covenant by midyear. The first issue, which would breach a covenant on $6.41 billion in bank debt, would become an event of default 30 days after delivery of a default notice -- and in turn could trigger an acceleration of the debt and, subsequently, $2.85 billion in unsecured notes.

"The company is currently considering a restructuring through a 'prepackaged,' 'prenegotiated' or similar plan of reorganization under federal bankruptcy laws," Idearc warns in its 10-K.

Idearc and its advisers continue to work with representatives of holders of both the senior secured facilities and the senior unsecured notes in this regard. If the company is unable to achieve a 'prepackaged,' 'prenegotiated' or similar plan of reorganization, it would likely be necessary that the company file for reorganization under federal bankruptcy laws in any event.

Whatever happens to Idearc, it has company -- fellow Yellow Pages company R.H. Donnelley Corp. (OTC:RHDC) has $9.41 billion in debt and posted a $3 billion loss last year, although that figure included $3.87 billion in impairment charges. R.H. Donnelley has retained Lazard to advise on its capital structure, "including various balance sheet restructuring alternatives." R.H. Donnelley CFO Steven M. Blondy in a 2008 earnings release says it may be impossible to refinance debt that matures next year and that discussions with banks and bondholders on amending, refinancing or restructuring the debt will begin.

- David Elman

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