Why You Should Back Your Own Analysis – The Private Equity Example
In November 2006 – Telecom New Zealand ($TEL.NZ) announced plans to sell their directory business in a competitive process. Analysts placed a range of values between NZ$1.5 billion to NZ$2.2 billion. I ran some numbers and came up with a NZ$850 million valuation – using Yell Group ($YELL) in the UK as a comparator. In my analysis I wrote the following paragraph:
I believe these numbers (NZ$1.5-2.2 billion) are fantasy. The top of our valuation – based on sensitivities – is NZ$1.1 billion. Using the current 13.8x Yell multiple gives a valuation of NZ$1.21 billion.
As a result of some discussions I revised the analysis 24 hours later with some more aggressive assumptions. My updated valuation was NZ$1.10 billion with a range of NZ$867 million to NZ$1.36 billion.
But hey – there was a fully-fledged private equity boom going on. What did I know.
In early 2007 to get to the short-list of potential acquirers for the Telecom New Zealand directory business required a NZ$2.1 billion bid. I wrote yet another piece – with the following excerpts:
But it appears our valuation was wrong. The rumours in the market were that it took NZ$2.1 billion to make the short-list and the four finalists are all private equity players. Our valuation was NZ$1.1 billion – that is a long way short of NZ$2.1 billion.
Here at Valuecruncher we back our analysis – and when we are that far out we want to know why.
and
This has been bugging me – I don’t like being this far out on valuations. I like to think it isn’t typical.
Then I proceeded to explain the bid valuation as best I could (summary – really cheap debt).
In March 2007 with the closing of the sale to CCMP I noted:
Valuecruncher believes the result is an excellent one for Telecom.
Since 2007 it hasn’t been an easy time for owners of highly leveraged directory assets. Debt isn’t as cheap as it was (check out this Bloomberg piece from February 2007 – the world has changed). Another strange thing – people are also using this internet thing where they previously relied on services like directories. That means there is pressure on key directory revenue streams (like advertising).
There is a long piece in the New Zealand media today (Sunday Star Times written by Tim Hunter) about the challenges facing the directory business – now called Yellow Pages Group. It quotes a number of unnamed sources using Yell Group ($YELL) in the UK as a valuation comparator (“Yell in the UK has just restructured and trades at seven times earnings“). With Yellow Pages Group having EBITDA of around NZ$130 million – that places an enterprise value on Yellow Pages Group of “NZ$750-$800 million“. Note the article has senior debt holders being owed NZ$1.2 billion – ouch. The article is a good piece of analysis by Tim Hunter.
Our Valuecruncher interactive analyst report for Yell Group backs up this analysis (have a play with the DCF tab as well). A 6.3x EV/EBITDA multiple for Yell Group and a NZ$130 million EBITDA gives an enterprise value for Yellow Pages Group of NZ$819 million. Enterprise value is the value of the whole business (equity and debt).
Hold on – isn’t that just about where I started?
Lesson: Do robust analysis and run the numbers – and back that (even in the middle of a private equity boom).
April 27th, 2010 at 12:02 pm
I recall when the Yellow Pages was being sold speaking with the head of Recycling at the Christchurch City Council owned company that managed all recycling for the city. He said that they collect all directories and had noticed an almost halving each year of the tonnage of printed directories that they were collecting and on selling to pare recyclers. The only conclusion that you could draw was that Telecom were printing less and less directories.Probably because people didn’t want them anymore. The directories model is all about selling real estate in printed books, if people prefer go online even to visit yellow.co.nz then the selling of space in a book that you are printing less and less of every year seems like a rip off. At the time it seemed like a joke price to me to pay for a business that was going out of business.