Novice Investing - Yellow Page is Gold

Date: Sunday 20th 2008f July 2008 12:32:28 PM

Yellow Page is Gold - 12/5/2005

By: Novice Investing Staff

Over the weekend, Verizon Communications Inc. (VZ) is contemplating on selling its phone-book business. This business publishes 1750 directory titles in 44 states. The circulation is expected to top 121 million copies annually. Revenue for this business is $ 3.6 Billion last year while employing 7300 people. Estimates for the publishing unit value is as much as $ 17 billion.

Yellow page is a cash flow producing business. Whenever we need some local information, the first place we go is to look up a yellow page. Yellow page cost nothing to the user. However, company such as Verizon makes money on yellow page from the advertising on the listing.

Most phone companies already sold their yellow-page operations. The largest sale was QwestDex yellow pages formerly owned by Qwest Communications (Q) for $ 7 Billion back in 2002. The reason? Trend towards online search. Sifting through yellow pages listing is cumbersome. With google, all you have to do is type in a phrase and it will display the most appropriate result for you. Furthermore, yellowpage is heavy and update occurs only once a year. With search engine, listings get updated as soon as new information is coming in. Furthermore, the cost of advertising online is way cheaper than yellow pages currently.

The trend does not bode well for yellow pages business. However, yellow pages is still a cash flow generator. If you bought the business at a decent price, you can get a high return on investment and a relatively short pay back period.

$ 17 Billion seems like a high price considering the trend of moving online regarding the source of information. To give you an idea, earlier this year, the company acquired MCI communications for a 'mere' $ 6.75 Billion. This sale will enable Verizon to afford buying 2.5 MCIs.

If the sale can be that high, it is good for Verizon. While it is not in danger of depleting cash anytime soon, the latest balance sheet shows that the

company has a negative net cash of $ 27 Billion. This means that long term debt is $ 27 Billion larger than its cash equivalents and long term investments. To give you an estimate, with 5 % interest rate, interest expense costs $ 1.35 Billion annually for Verizon. For a lot of companies, paying that much of an interest expense will send them to bankruptcy court. Luckily, Verizon is in a telecommunication business that provides strong and steady cash flow. In 2004, it booked a profit of $ 7.8 Billion.

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 Verizon Communications Inc. (VZ) or any other securities.

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