On 3 November Telecom New Zealand announced their first quarter result and that they would be running a competitive process for selling their directory business – Yellow Pages Group (Yellow Pages).
Analysts have placed values on the Yellow Pages business of between NZ$1.5 billion and NZ$2.2 billion.
We decided to have a look and see what sort of valuation we would place on Yellow Pages.
Before we get to Yellow Pages here in New Zealand – it is worth having a quick look at Yell Group (Yell) in the UK. Yell was the directories business owned by BT (British Telecom) that was sold to private equity firms in 2001 and then listed on the London Stock Exchange (LSE) in 2003. This is a pretty good case study of what might happen with Yellow Pages here in New Zealand.
BT sold the business in 2001 for GBP2.14 billion – that year the business had EBIT of approximately GBP220 million (normalised EBITDA of GBP245 million for the year ended 31 March 2002 and we have assumed GBP25 million of depreciation and amortisation – 31 March 2006 EBITDA of GBP503 million with GBP54 million of depreciation and amortisation). This equates to an Enterprise Value (EV)/EBIT multiple of 9.7x. At the time of the sale the business was operating 25% EBIT margins – revenues of GBP865 million and EBIT of approximately GBP220 million.
Over the next five years to 31 March 2006 Yell increased revenues at a compound annual growth rate of 17% and adjusted EBITDA (for abnormal items) at 20%. For the year ended 31 March 2006 Yell had revenues of GBP1.62 billion and EBIT of GBP449 million – 28% EBIT margin. 96% of these revenues in 2006 were derived from selling advertising in printed classified directories.
It is worth noting that Australian Telco Telstra’s wholly owned directories business – Sensis – has EBIT margins approaching 50%. Sensis is however not an independent company.
Significant parts of Yell’s growth had been achieved by acquisitions in the United States (now reptresenting over half the 2006 EBIT). In July 2006 Yell completed the acquisition of Spain’s primary directory business (not included in any of the financial or staff numbers used in this analysis – but incorporated in the current share price).
Yell had 11,500 employees at 31 March 2006 so derived GBP141,000 of revenue per employee. This converts to NZ$403,000 at 0.35.
Today Yell trades on an EV/EBIT multiple of 13.8x.
Yellow Pages in New Zealand
This is what we know:
Yellow Pages last year had approximately NZ$250 million of revenues with approximately 600 people. For the first three months of the current financial year revenues grew by 11.3% against the prior period last year to NZ$69 million. This equates on a run rate basis to approximately NZ$276 million this year of revenues.
Our valuation approach
We started with the NZ$250 million of revenues for last year. We have assumed that there is scope for considerable growth over the next three years and used 20% annual growth from 2007-9. The current period has growth of 11.3% so far – we are saying that Yellow Pages can do better than that over the next three years. We don’t specifically value growth options (i.e. new electronic services) – remember 96% of Yell’s revenues are still print based advertising. But this growth rate implies some new revenue streams – the same large acquisitions made by Yell internationally are not available to Yellow Pages (in our opinion). We use a 3% terminal growth rate post-2009.
We have looked at Yell’s 28% EBIT margin and Sensis’s nearly 50% margin and used 35% as an EBIT margin. We think Yellow Pages can do better than Yell but that Sensis’s EBIT margins are inflated by not being a fully independent company.
With 600 employees – Yellow Pages derives NZ$458,000 of revenues per employee. This is comparable with Yell’s NZ$403,000 per employee and further justifies our slightly higher EBIT margin.
A copy of our valuation is included below. We produce a mid-point valuation of NZ$897 million – well below the NZ$1.5-2.2 billion being suggested. We come out at an historic EV/EBIT multiple of 10.3x – compared to Yell’s 9.7x when the business was originally sold and 13.8x today. It should also be noted the Yell share price has risen 19% since late June 2006 on the successful acquisition of the Spanish directory assets – the market views Yell as a higher value owner of the assets. This has inflated the current multiple – prior to the acquisition the multiple was 11.9x. We have used the 13.8x multiple in our analysis – but it does include expected growth in the newly acquired Spanish assets.
To get to the NZ$1.5 billion valuation with our assumptions requires 45% compound annual growth to 2009. Which will be very hard without major innovation or significant acquisitions – where will the acquisitions come from? This is a 17.5x historic EV/EBIT multiple and a 14.3x forecast EV/EBIT multiple (assuming 35% EBIT margins and 20% revenue growth this year). To get to NZ$2.2 billion is 65% compound annual growth and 25.4x historic EV/EBIT multiple and 21.0x forecast EV/EBIT multiple. TradeMe was bought by Fairfax for 26.9x historic EV/EBIT and 15.6x forecast EV/EBIT.
I believe these numbers (NZ$1.5-2.2 billion) are fantasy. The top of our valuation – based on sensitivities – is NZ1.1 billion. Using the current 13.8x Yell multiple gives a valuation of NZ$1.21 billion.
There are some serious strategic questions about actually selling Yellow Pages – BT ultimately stared another directories business after selling Yell. BT originally sold Yell because of severe debt issues after buying 3G mobile spectrum – Telecom New Zealand has no such pressures.
At Valuecruncher we don’t believe that Telecom New Zealand will achieve the sale price currently being discussed in the market – NZ$1.5 billion+. An acquirer paying NZ$1.5 billion+ would need to extract some significant synergies and be prepared to pay for them in the sale process. Our number is around NZ$900 million. We will watch the process with great interest.
TEL Yellow Pages Group Valuation