Novice Investing - Yellow Pages Losing Its Gold

Date: Tuesday 13th 2008f May 2008 07:30:08 AM

Yellow Pages Losing Its Gold - 02/27/2008

By: Hari Wibowo

Back in 2005, we talked about the glitter of the Yellow Pages business which climaxed with the sale of Verizon's phone book business. Verizon's phone book business which was then called Verizon Information System (VIS) and was valued as much as $ 17 Billion. At the time, VIS produced $ 3.6 Billion in revenue while employing 7300 people. The rumor was, VIS was getting a valuation of 10 times EBIDTA. (Earning Before Taxes Interest and Depreciation). VIS was then spinned off under a new entity, Idearc Inc. (IAR).

Fast forward in 2008, two notable companies in the yellow pages business are getting clobbered with their shares down more than 70% from its high. The concern is two fold; One, Investors are expecting a slow advertising spending in an economic recession predicted in 2008. Two, online advertising has taken market share of phone book advertising in recent years. The latter has affected not only the phone book business but a newspapers and magazine industry as well. Take a look at the table below.

Company	Revenue	EBIDTA	Enterprise Value	Multiple EBIDTA
RH Donnelley	$ 1.895 Billion	$ 765 Million	$ 11.094 B	14.5
Idearc	$ 3.221 Billion	$ 1.412 Billion	$ 9.915 B	7.02

Therefore, clearly, Verizon was getting a good valuation by selling it at 10 times EBIDTA at the time, which made Idearc worth $ 14 Billion at the time. Now, with a debt load of $ 9 Billion, Idearch market capitalization is worth $ 9.915 Billion or 7.02 times EBIDTA. Is that good or bad?

While valuation wise, both companies are getting cheaper, they are not yet in the undervalued territory. Let's not talk about RH Donnelley which can be found in most other stocks with less debt. I'm referring to Idearc which earns close to $ 400 Million last year. Despite the high debt level, Idearc has been giving away dividends at a rate of $ 200 Million per year. With market capitalization of $ 1.02 Billon, that is equivalent to 18% yield. For most of

investments, investing in companies with high debt level is inherently risky. The steady nature of the phone book business has reduced the risk somewhat but the risk is still there. Thus, management was also giving away its dividends as a way to entice shareholders to buy the share.

But wait, there is another caveat. In Idearc's 2006 income statement, interest expense was 'only' $ 60 Million annually. That is what I consider as low. With long term debt of $ 9.0 Billion and 6% interest expense, you would expect Idearc to incur $ 540 Million of interest expense, which will wipe out its profit for the year entirely. Looking at both companies, apparently none has any intention of building a long term business. This is more pronounced with Idearc where the company is incurring a huge debt while giving most of its profit, if any, in the form of dividend.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Idearc Corp. (IAR) or any other securities.

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