Bidding on the Yell Group
Yell Group consists of two businesses that are operating across countries. Yellow Page is a classified directory business in the UK, while Yellow Book is an independent directory business in the USA. These businesses are currently owned by British Telecom which is under pressure to reduce its heavy debt load and had been wavering for months about the future of these two Yellow Pages divisions. Apax Partner and Hick Muse are two private equity firms that are interested in the acquisition of the Yell Group by using debt for a majority of the purchase price and equity for the remainder. The deal is crucially important to both Apax and Hicks Muse because of its high visibility — simply by virtue of its size and complexity, it will leave its mark on the reputations of both PE firms. But the team faces a challenge when valuing a cross border business involved in the LBO. Not only are those business located in different markets, but they also are characterized by different growth rates and cash flow characteristics. Furthermore, each business unit faces an immediate uncertainty.
2. Overview of LBO
The Equity Sponsor borrows the debt portion of the purchase price, typically through public or private bonds and bank loans issued by the company and contribute the equity portion typically through a private fund. Debt is serviced and repaid with the company’s operating cash flows. The buyer later sells all or a portion of the company and realizes a return on its initial equity investment — Sale of Sponsor equity typically through an initial public offering or a sale to a strategic buyer or another LBO firm. The LBO transaction focuses on cash flows generated by operations and the use of the cash to pay down debt, thereby increasing equity value. Additionally, improvements in operating performance can increase value. Assuming the enterprise value remains unchanged, as debt is repaid, value reverts to the equity holders, thereby generating equity returns. Through this cross-border LBO, our team wants to achieve three fundamental goals: a) Determining the enterprise value of Yell Group by measuring its ability to generate sufficient cash flows to meet required equity returns while complying with leverage parameters. b) Calculating financial ratios and other measurements to determine the balance sheet and credit impact of the LBO c) To justify whether they can get reasonable returns given financial projections and leverage assumption in the model. Our team is aim to use as much leverage as possible to minimize initial equity check and create an aggressive financing structure that can be effectively syndicated to the market.
3. Yell Operations
When valuing Yell, we find that Yell currently has two well-established business lines in two different markets. While the environment is different in each market, Yell’s business lines achieve somewhat steady cash flows that are on pace with market growth, even the OFT is expected to recommend the imposition of a limit on the annual increase in rates for advertising in the U.K. market. The projected EBITDA for both BT Yellow Pages in the U.K. and Yellow Pages USA combined are more than enough to cover the considerable interest expense. Furthermore, with the ambitious growth plan, Yellow Book hopes to capture much of the predicted market share gains. A good LBO candidate should have some characteristics on its business specific and industry specifics. That means, the underlying Yell fundamentals and competitive advantage should be much more scrutinized by the team. Indeed, BT Yellow Pages as a market-leader in the classified directory business and Yellow Pages USA as a market leader in the independent publisher of business directories. Finally, shortly before Apax and Hicks Muse had initiated talks with BT executives about the future of Yell, the telecom giant had announced plans to pay down its debt, so this deal should be...
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