Bloomberg News is reporting today that AT&T is close to a deal to sell a majority stake in its Yellow Pages operation (AT&T Advertising Solutions, the world’s largest directory company, in a deal that prices the business at US$1.5 billion. This price works out to a multiple of 1.5X EBITDA. AT&T is expected to hang on to a large minority stake in the business.
In 2011, AT&T Advertising Solutions generated topline revenues of US$3.3 billion and EBITDA of US$1.0 billion, representing declines of 16 percent and 24 percent, respectively. AT&T indicated on its Q4 earnings call that it was open to selling its directories business, and since then there have been persistent rumors of an imminent deal.
To put matters in perspective, when a consortium of private equity players acquired Yellow Pages Group (new Zealand) in early 2007, the multiple was 14X EBITDA. That deal was considered the last hurrah of high-multiple directory deals. Had AT&T sold its directory business at the same time at just half of New Zealand’s gaudy 14X multiple, the take would have been US$13.6 billion.
Following the New Zealand deal (which was recently converted to equity), what had been manageable top-line declines accelerated to the point where leverage became burdensome. Bankruptcies and huge write downs soon followed, and many directory companies continue to struggle with too much debt.
With that history and the uncertain future of Yellow Pages revenues and margins, it’s no surprise that the multiple has been squeezed to such a modest level. Cerberus Capital is the reported suitor for AT&T’s Yellow Pages business. According to the private equity firm’s website, it focuses on investing in under-valued assets, emphasizing long-term value creation. At a sufficiently low multiple, AT&T should be cash generative enough to pay its buyers back in short order. The question is whether Cerberus will see an opportunity for long-term value creation or just choose to cash out quickly.