Valuing a Cross-Border LBO

Bidding on the Yell Group

Introduction
 Introduction

Classified Directories, UK, 85% Market Share

Independent Publisher, US, Marketing-Leading

 Overview of LBO

LBO is the acquisition of a company or

division of a company using debt for a
majority of the purchase price and equity for
the remainder.
 Overview of LBO
For this cross-border LBO, our team should:

Build our own projections for the UK and US business

Decide which method to choose for valuing the two business

Consider that the US and UK business operated using

different currency
 Overview of LBO
A good LBO candidate will demonstrate many, if not all, of
the following characteristics:

Business Specific
 Strong management team
 Steady and predictable cash flow
 Opportunities for immediate
 Minimal required capital expenditures
 Limited working capital requirements
 Divestible assets over time
Industry Specific
 High market share
 Margins will not likely be pressured
 Industry with high barriers to entry
 Low cyclicality of industry
 Viable exit strategy
Yell Operations
Steady Cash Flow

OFT Imposition

Additional Divisions

Ambitious Growth Plan

New Market Launches

Early Stage of Life Cycle

 Yell Operations
Re-projection

BT Yellow Pages—Historical Financial Information and Pro forma for the Business, 1999–2005 (pounds in
thousands)

Actual Actual Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma
Year 31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07
Advertisement Volume (‘000) 813 853 909.298 969.3117 1033.286 1101.483 1174.181 1251.677
Weighted Average Advertisement Price (£) 641 645 621.78 598.77 574.82 551.83 529.76 508.57

CCF Valuation for Yell Book

(dollars in thousands)
Actual Actual Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma
Year 31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07
Revenues (New Launches) 56700 64800 56700 64800 0 0
EBTIDA (New Launches) for 1st year 2,835 3,240 2,835 3,240 0 0
Revenues (Organic) 364,900 418,400 487,350 533,800 688,390 757,229
EBITDA (Organic) 62,033 79,496 102,344 122,774 172,098 189,307
 Transaction Assumption
 BT Yellow Pages has its price adjusted for inflation as stated by
the OFT.
 The U.K. discount rate is calculated using the comps Telefonica
Publicidad e Informacion and Enriro.
 The U.S. discount rate is calculated using McLeod USA and
World Pages.
 The terminal 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.
 For the base case, the terminal value growth rate of Yellow Book
USA is 4.3% which is the historical growth of the RBOCs.
 New launches in the U.S. are forecasted to return 5% EBITDA to
Sales in the first year.
 Once launched, the new markets are assumed to reach organic
EBITDA margins in the following year.
 The risk premium of both markets is set as 6.5%
 Valuation Method
It is accepted that CCF valuation is widely used for LBO.
WACC is not applicable here because the calculation of WACC
assumes constant D/E ratio. Based on the debt repayment
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.

Yell’s two business line, BT Yellow Pages and Yellow Book

USA, operates and generates revenue from their respective
countries; therefore, we must look each asset as a separate
part.
 Valuation Method
CCF Valuation for Yell Pages Growth Rate
(pounds in thousands) 3.47%
Actual Actual Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma Terminal
Year 31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 (Perpetuity)
Revenues 521133 550185 565383 580399 593957 607832 622031 636561
Discounts and free ads 42,402 47,276 78,180 86,585 84,324 86,615 85,366 86,049
Direct costs 180,479 187,395 195,972 201,742 206,649 211,278 214,996 216,716
Overhead costs 102,530 88,870 74,930 77,137 79,013 80,783 82,204 82,862
EBIT 195,722 226,644 216,301 214,935 223,971 229,156 239,465 250,934
Tax Rate 30% 30% 30% 30% 30% 30% 30% 30%
EBIAT 137,005 158,651 151,411 150,454 156,780 160,409 167,625 175,654
Change in WC 10,570 12,772 2,178 6,000 8,497 6,300 4,375 2,023
Capex 7,380 9,760 10,220 9,730 9,230 8,380 8,000 8,000
Depreciation 5,530 5,370 6,130 8,850 8,400 7,630 8,000 8,000
FCF (main business) 124,585 141,489 145,143 143,574 147,453 153,359 163,250 173,631 1,878,027
Year 0 1 2 3 4 5 6 6
Discount Factor 0.88 0.78 0.69 0.61 0.54 0.48 0.48
PV of FCF 128,403 112,366 102,092 93,935 88,461 83,234 900,280
Sum of FCF 1,508,771

FCF (other business -4,566 -14,438 -12,641 -8,238 1,362 1,956 10,000 20,000 153,409
PV of other UK businesses -11,183 -6,447 943 1,198 5,419 9,588 73,541
Sum of PV of other UK business 73,058
 Valuation Method
Debt schedule for Yell Pages
(pounds in thousands)
Actual Actual Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma Amount Interest
Year 31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07
Senior Term Loan A 47,400 47,400 43,450 37,525 29,625 19,750 600,000 7.90%
Tax shield (t x interest payment) 14,220 14,220 13,035 11,258 8,888 5,925
PV of tax shield 53,906 13,179 12,214 10,376 8,305 6,077 3,755
Senior Term Loan B 14,263 14,263 14,263 14,263 14,263 14,263 175,000 8.15%
Tax shield (t x interest payment) 4,279 4,279 4,279 4,279 4,279 4,279
PV of tax shield 19,690 3,956 3,658 3,382 3,128 2,892 2,674
Senior Term Loan C 14,700 14,700 14,700 14,700 14,700 14,700 175,000 8.40%
Tax shield (t x interest payment) 4,410 4,410 4,410 4,410 4,410 4,410
PV of tax shield 20,142 4,068 3,753 3,462 3,194 2,946 2,718
High Yield Bond 53,750 53,750 53,750 53,750 53,750 53,750 500,000 10.75%
Tax shield (t x interest payment) 16,125 16,125 16,125 16,125 16,125 16,125
PV of tax shield 68,712 14,560 13,147 11,870 10,718 9,678 8,739
Vendor Loan 5,400 5,400 5,400 5,400 5,400 5,400 100,000 5.40%
Tax shield (t x interest payment) 1,620 1,620 1,620 1,620 1,620 1,620
PV of tax shield 8,118 1,537 1,458 1,384 1,313 1,245 1,182
Revolving Credit Facility 7,900 7,900 7,900 7,900 7,900 7,900 100,000 7.90%
Tax shield (t x interest payment) 2,370 2,370 2,370 2,370 2,370 2,370
PV of tax shield 10,990 2,196 2,036 1,887 1,748 1,620 1,502
Total PV of tax shield 181,558
 Valuation Method
CCF Valuation for Yell Book Growth Rate
(dollars in thousands) 4.30%
Actual Actual Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma Terminal
Year 31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 (Perpetuity)
Revenues (New Launches) 56700 64800 56700 64800 0 0
EBTIDA (New Launches) for 1st year 2,835 3,240 2,835 3,240 0 0
Revenues (Organic) 364,900 418,400 487,350 533,800 688,390 757,229
EBITDA (Organic) 62,033 79,496 102,344 122,774 172,098 189,307
Total EBITDA 64,868 82,736 105,179 126,014 172,098 189,307
EBIT 58,628 74,826 97,749 117,204 164,098 181,307
Tax Rate 35% 35% 35% 35% 35% 35%
EBIAT 38,108 48,637 63,537 76,183 106,663 117,850
Change in NWC 37,596 43,108 50,212 54,998 70,925 78,018
Capex 10,600 8,700 8,170 8,990 8,000 8,000
Depreciation 6,240 7,910 7,430 8,810 8,000 8,000
FCF -3,848 4,739 12,585 21,005 35,738 39,832 522,236
Year 0 1 2 3 4 5 6 6
Discount Factor 0.89 0.79 0.71 0.63 0.56 0.50 0.50
PV of FCF -3,428 3,761 8,897 13,228 20,049 19,907 260,992
Sum of FCF 323,406

Converted to Pound by spot rate 224,588

 Valuation Method

Total Value of Yell Group (£’000) 1,987,974

Acquisition Fee with 5% transaction fee (£’000) 2,087,373

 Sensitivity Analysis
Sensitivity in Yell Pages to regulartory imposition
(Keep the terminal growth rate at 3.47%)
Acquisition Fee with 5% transaction fee (£’000) imposition
2,087,373 -6.00%
Sensitivity in Yell Page to Growth Rate 2,302,097 -5.00%
Acquisition Fee with 5% transaction fee (£’000) Growth Rate 2,527,057 -4.00%
2,087,373 3.47% 2,762,573 -3.00%
1,949,762 2.00% 3,009,062 -2.00%
1,992,235 2.50%
2,038,940 3.00%
2,147,853 4.00%
2,211,879 4.50% Sensitivity in Yell Pages to EBITDA margin of new launches
2,283,871 5.00% Acquisition Fee with 5% transaction fee (£’000) Margin
2,087,373 5.00%
2,085,640 3.00%
Sensitivity in Yell Book to Growth Rate 2,086,506 4.00%
Acquisition Fee with 5% transaction fee (£’000) Growth Rate 2,088,239 6.00%
2,087,373 4.30% 2,089,106 7.00%
2,049,580 2.50%
2,058,603 3.00%
2,068,657 3.50%
2,107,134 5.00% Sensitivity to risk premium for both markets
2,123,757 5.50% Acquisition Fee with 5% transaction fee (£’000) Premium
2,143,038 6.00% 2,087,373 6.50%
2,399,743 5.50%
2,232,233 6.00%
1,960,880 7.00%
1,849,488 7.50%
 Conclusion

We viewed Yell as a compelling investment

opportunity, particularly in light of the
company’s growth potential, low valuation and
leverage capacity. This deal will leave its mark on
the reputations of both PE firms.
Thank You!