Bidding on the Yell Group Essay

1. Introduction vocife drift sepa number consists of devil c argons that ar operational crossways countries. colour Page is a sort directory billet in the UK, term ab practiceowness agree is an independent directory retrace of work in the the States. These condescensiones be shortly owned by British Telecom which is under draw to reduce its heavy debt load and had been fluctuation for months about the future of these two yellow Pages divisions. Apax Partner and Hick M social function ar two private loveliness firms that are absorbed in the acquirement of the telephone call Group by utilize debt for a majority of the purchase cost and rectitude for the remainder. The deal is cruci anyy important to two Apax and Hicks Muse because of its high visibility exactly(prenominal) if by virtue of its size and complexity, it pass on cease its mark on the reputations of both(prenominal) PE firms. unless the team faces a argufy when valuing a cross border dis dain involved in the LBO. Not only are those line of business located in different securities industrys, but they also are characterized by different increment judge and money hunt characteristics. Furtherto a greater extent, individually business unit faces an immediate uncertainty.2. Overview of LBO The Equity help borrows the debt portion of the purchase terms, typically through with(predicate) public or private bonds and blaspheme loans issued by the beau monde and contribute the virtue portion typically through a private fund. Debt is serviced and repaid with the ships social clubs run hard currency flows. The purchaser later sells all or a portion of the company and realizes a return on its sign equity enthronization Sale of giver equity typically through an initial public offering or a barter to a st sitegic buyer or an unsanded(prenominal) LBO firm.The LBO accomplishment focuses on cash flows gene rated by trading operations and the use of the cash to pay down debt, t here(predicate)by out step-up equity harbor. Additionally, improvements in in operation(p) performance potty increase honour. presume the opening appraise 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 strain collar fundamental goals a) Determining the maiden step value of exclaim Group by cadence its ability to generate sufficient cash flows to meet required equity returns composition complying with leverage parameters. b) Calculating monetary ratios and other measurements to determine the balance sheet and impute extend to of the LBO c) To justify whether they can proceed reasonable returns given financial projections and leverage assumption in the example. Our team is point to use as frequently leverage as possible to minimize initial equity check and create an offensive financing structure that can be effectively syndicated to the foodstuff.3. ejaculate OperationsWhen valuing beef, we go through that Yell currently has two well-established business lines in two different markets. bit the environment is different in each market, Yells business lines achieve close to steady cash flows that are on pace with market issue, even up the OFT is expected to recommend the prevarication of a limit on the course of instructionbook increase in rates for publicise in the U.K. market. The projected EBITDA for both BT yellow Pages in the U.K. and discolor Pages ground forces unite are to a greater extent than enough to prepare well the work outable interest expense. Further more than, with the ambitious branch plan, yellow(a) throw hopes to capture much of the predicted market share gains. A serious LBO candidate should have some characteristics on its business specific and industry specifics. That means, the profound Yell fundamentals and competitive improvement should be much more scrutinized by the team. Indeed, BT chickenhearted Pages as a market- attractor in the classified directory business and discolor Pages regular army as a market leader in the independent publisher of business directories.Finally, shortly before Apax and Hicks Muse had initiated dialogue with BT executives about the future of Yell, the telecom titan had announced plans to pay down its debt, so this deal should be a fire-sale transaction, the sale of Yell is unspoiled for BT and its shareholders. However, BT Yellow Pages and Yellow Book USA represent two very(prenominal) different businesses. The U.K. business is loose to heavy regulation which pass oning control the price. Thus the only way to diffuse profits is through the advertizement volume.Unfortunately, the reaping in the classified directories announce market has been declining everywhere the last few decades and result probably continue in this leaning even though the summarize advertising market has confabulaten incr easing egress. The electric potential good opportunities for this business could be the spare divisions that BT Yellow Pages owned. Prospective investment indicated these businesses are in the early stages. The U.S. market is an important seminal fluid of freshly business for SMEs throughout the realm and the independents are projected to increase their market share from 11% to 30% over the 2000 2005 period.For Yellow Book, this ontogenesis is to be provide by expansion efforts as insertion new directories into contiguous markets and launching encompassing area books into cities without an independent presence. In impairment of the industry life cycle, BT Yellow Pages is almost likely in the late maturity date / early decline stage while Yellow Pages USA was still in the ingathering phase. These factors combined with the buyers investment position will influence their exit strategy. Yell Group Ltd. provided Apax and Hicks Muse team with projections for both BT Yellow Pages and Yellow Book USA found on what a potential ontogeny in the upcoming years.Since Yell is trying to sell their business, we have to be careful about the assumptions use to make love up with these projections. As a financial buyer, we tend to leave the day-to-day operations with watchfulness and olibanum would hope that they can meet their projections. These numbers racket should be viewed conservatively, as Yell would want to make the company look as attractive as possible to potential buyers. For BT Yellow Pages, their exploitation is dependent on the number of advertisements interchange in a given year and the advertisements prices. Thus, as a potential buyer, these areas inquire to be scrutinized to come up with a reasonable projection. The growth rate (nominal) of advertisement volume from 2001 to 2007 whitethorn be as high as the rate of retiring(a) years at 6.6%, and for SMEs, BT Yellow Pages were considered a must(prenominal) buy, since the yellow pages are their principal means of legislateing customers in UK.Yellow pages advertising expenditures tends to be more stable than other forms of media advertising and do not fluctuate widely with scotch cycles. For advertisement prices, the trend is slightly increasing from 2001 to 2003 and flat thereafter. Yells management fronts to be too optimistic here as the OFT is expected to announce its new recommendation for the following years soon. Since the cap is 6% below the rising prices rate and the projections for inflation is 2.4% in 2002, 2.3% in 2003, and 2.0% thereafter, the advertising prices should be expected to dis walkover a decreasing trend. For example, the Weighted sightly Advertisement Fee in 2002 should be 621.78 = 645 x (1 + 2.4% 6%).The year-over-year revenue growth for Yellow Book USA ranges from 10.0% to 15.0% with an average of 12.5% and a com tucker average growth rate of 12.4%. Organic growth in the US market is 4-5% and so the excess growth for Yellow Book USA m ust be coming from new market launches as well as increasing market share as an independent publisher. The growth rates seem quite aggressive and so additional new market launches whitethorn be required in years 2005 and 2006, currently not projected, to ensure that there is a buffer to hit revenue projections. It may make sense to also settle the revenue growth rate to be more realistic and use yells projection as an speed limit eluding. We think it important to discriminate organic revenues from new launch revenues and only apply an EBITDA strand to organic gross sales while separately adding in the impact of new launches in order to plunk the two very different types of markets together.This climax also affords an opportunity to give a more sophisticated treatment to operating income from new launches. We believe that a 17% EBITDA margin on organic sales is a more realistic drive for 2002, improving at a 2% increase per year as business goes up until the 25% target rat e is hit in 2005 and maintained thereafter. chief city Expenditure and depreciation also pack to be reviewed as they are somewhat positively related, which means an increase in Capital Expenditure usually results an increase in depreciation and vice versa. Overall, the numbers for both markets should be viewed with skepticism as these are Yells projections and may not reflect the buyers expectations in terms of the growth in the market.4. Transaction Assumption The following transaction assumptions must be considered at the graduation of LBO digesta) BT Yellow Pages has its price modify for inflation as stated by the OFT. b) The U.K. discount rate is compute using the comps Telefonica Publicidad e Informacion and Enriro. c) The U.S. discount rate is calculated using McLeod USA and World Pages. d) The model assumes the debt is held in the U.K. and the U.S. business line will have its cash flows converted to U.K. denominated pounds at the spot rate- For the base case, the concl uding value growth rate of BT Yellow Pages is 3.47% which is a forecast of the compound average growth rate of FCF from 2002 to 2007 based on our projection. sensitiveness analysis should be employ to see how the growth rate of terminus value would postulate the general rating. e) For the base case, the last-place value growth rate of Yellow Book USA is 4.3% which is the historical growth of the RBOCs. Sensitivity analysis should be utilise to see how the growth rate of terminal value would affect the overall valuation. f) brand-new launches in the U.S. are forecasted to return 5% EBITDA to Sales in the first year. This is a conservative estimate and sensitivity analysis should be applied to see how the EBITDA margin of new launches would affect the overall valuation. g) once launched, the new markets are assumed to reach organic EBITDA margins in the following year. h) The fortune tribute of both markets is set as 6.5% and sensitivity analysis should be applied to see h ow the encounter premium would affect the overall valuation.5. Valuation MethodIt is accepted that CCF valuation is widely used for LBO. WACC is not applicable here because the advisement of WACC assumes eonian D/E ratio. Based on the debt refund schedule, it is unlikely that the firm will be able to maintain a constant ratio. CCF is ideal for this transaction because the debt repayment schedule is known in advance. CCF separates the calculation into two parts unlevered cash flow using unlevered apostrophize of equity and valuate shield using the unlevered cost of equity. For our calculation, CCF is more suitable due to the known debt repayment schedule and the more conservative valuation. approaching up with an accurate valuation becomes more complex when dealing with different capital of cash flows from cross border summations.Yells two business line, BT Yellow Pages and Yellow Book USA, operates and generates revenue from their individual countries therefore, we must l ook each summation as a separate part. We could do a separate valuation on each asset based on the home countrys bullion and financial projections. To determine a exemplar discount rate, we used betas and Debt/EV ratios of alike(p) listed companies in Exhibit 10 from each region. For example, for Yellow Book USA, we only used betas and Debt/EV of comparable American firms and not European firms and we assume the try premium is 6.5%. We also had to take into report deviation in risk-free rates by looking at country-specific yield on 30 years Treasury Bills when work out the cost of equity for each asset.Depending on the capital structure, each asset may have value benefit from tax-deductible interest payments. The interest tax shield must be calculated using the topical anesthetic countrys corporate tax rate therefore, each business line may have different cost of debt. At Yell, we used the U.K. tax rate of 30% because the acquired company is incorporated in the U.K. thus e verything is consolidated in pound. When make a valuation model, we also consider the growth potential of each asset separately as well.We take into account the firms local business strategy, competitors, and overall market potential to formulate a representative perpetuity growth rate. Once we get the enterprise determine for both assets, we can then use the spot rate to convert the enterprise set into pound for comparison. All these factors play a vital role when omen revenue growth / free cash flows, determining the discount rate and finally calculating a fair enterprise value for the firm. Using our pro forma assumptions and CCF valuation, the total acquisition fee is 2.09 billion (shown in transcend). The U.S. business is valued and converted to the pound to reach a total valuation. These values include the 5% in transaction fees.6. Sensitivity AnalysisSensitivity is do on five major variables. The first variable is the terminal growth rate of the U.K. business since BT Yellow Pages represents a bulky part of the total valuation (see excel file for the sensitivity of growth rate on BT Yellow Pages valuation). If the terminal growth rate is 5%, the total acquisition price with fees is 2.28 billion, compared to the 2.09 billion with the base case of 3.47% growth rate. The second variable is the terminal growth rate of Yellow Book USA. This scenario analysis doesnt affect the overall valuation much as the Yellow Book USA only accounts for a small fraction of the overall valuation.For the ternion variable, the analysis performed is the change in regulative imposition when keeping the terminal growth rate of UK business at 3.47%. shortly the base case is that revenue decreases by the inflation subtracting 6% annually. The results are shown in Sheet Sensitivity Tables. When there is no regulatory imposition applied and the price grows with inflation, the acquisition price with fees is 3.01 billion. If they can talk over with the UK government to red uce the rate to 5%, instead of 6%, the acquisition price with fees is 2.30 billion. It is highly sensitive to the change in regulatory imposition.This implies there is significant round top if the regulatory imposition is lower than 6%. For the fourth variable, we change the projections of Yellow Book USAs EBITDA margin of new launches in order to create a range where revenue projections are uncertainty. But there is not much of a difference among those valuations. The last scenario analysis performed is the risk premium for both markets, at the very beginning we assumed a 6.5% risk premium, but we also want to get a range of the valuation as the numbers changes. The results are from 2.4 billion to 1.85 billion. Overall, we are confident that the bid would be somewhere between 1.85 billion to 2.3 billion.7. Conclusion For this financial acquisition, we are more opportunistic and thereby looking for value creation based on the assets itself in order not to overvalue the target firm and thus overbidding for the company. In addition, we are looking to complicate its presence on the European LBO market. We viewed Yell as a compelling investment opportunity, particularly in light of the companys growth potential, low valuation and leverage capacity. This deal will leave its mark on the reputations of both PE firms.