Case : Valuing a Cross Border LBO: Bidding on the Yell Group

Q1) Is Yell a good leveraged buyout candidate?

Following parameters can be evaluated for candidature:

1) Strong market position (+): BT Yellow Pages was the market leader in the classified directories advertising
services. On the other hand, Yellow Pages USA was the market leading independent publisher of Yellow Pages
in the US. Both the operations were capable of generating enough cash to repay the debt making the cash
flows less risky.
2) Stable Cash Flows(+) : Both the operations are capable of generating steady cash flows (Exhibit 6 & 7)
3) Viable exit strategy (+) : Yell could again be sold to a competitor or through another LBO.Since the business
was lucrative because of its high visibility, it could easily be sold off for a premium.
4) Strong Management Team (+) : Yell had a stable management team with a proven track record.
5) Debt capacity (-) : Since BT was already highly leveraged, the debt capacity of Yell was questionable.In case of
a demerger its balance sheet would no longer remain clean.

Q2) How similar/different are the UK and the US businesses?

US and UK business were different in terms of

a) Location: Both faced different country risks. The UK market was mature while the US market was growing
rapidly.
b) Growth Rate : BT Yellow Pages had already commanded the market share while the Yellow Pages USA
being in a growing market faced competition from independents and RBOC(market leader)
c) Cash Flow Characteristics: BT Yellow Pages had stable cash flows. Yellow Pages USA had plans for
expansion and revenues from new launches were uncertain

However both faced uncertainties

BT Yellow Pages: OFT was expected to put a cap on annual increase in advertising rates. Regulatory imposition
could hurt the advertising revenues of the business.

Yellow Pages USA: It projected continued rapid expansion into new markets but success was uncertain.

Q3) Assess management projections and consider which assumptions to alter in each
business.

BT Yellow Pages : The management took a conservative approach and predicted a cap of rates at 6% below the
inflation rate. This required a revision of revenues .The new Price(P1) and Previous year’s price(P0) now followed
the relation for each year from 2002 to 2007.

P1=P0*(1+inflation rate – 6%)

Considering the costs were decided based on advertising volumes, they are assumed not to be changed on accont
of price revision.

Yellow Pages USA: The management wanted separate EBITDAs for organic revenues and new launches. This
requires segregation of the two revenues. Considering the new launches every year and Revenue from each launch
($8.1 mn average), revenues from new launches can be found and thus organic revenues can be deduced. Applying
different EBIDTA Margins we get individual EBIDTAs.

Working Capital: Change in working capital is not directly given. WC can be found by computing receivables and
payables from days receivable and days payable respectively. Change in WC can also be found thus.

Q4) 4. Value UK and US business with revised projections (based on information in the case).

See Excel Sheet

Q5) Justify the choice of DCF approach used. How is the data on comparable companies
relevant in this case analysis?

Since the given case is a case of leveraged buyout , WACC cant be used due to frequently changing capital
structure. As the debt for each year is known , the CCF approach can be used.

The data on comparable companies can be used to compute asset beta (discount rate for valuation). However
choice of apt comparable companies needs to be made. Also Beta vs. MSCI World Index needs to be considered
since the company has operations in both US and UK. Selection of comparable companies is as follows:

Companies Eligible to be a comparable Reason

SBC Communications No Not a pure player

Verizon No Not a pure player
BellSouth No Not a pure player
Qwest No Not a pure player
Sprint No Not a pure player
McLeodUSA Yes
WorldPages Yes
SEAT Pagine Gialle Yes
Wanadoo No One Year Data Available
Telefonica Publicidad e Informacion Yes
Eniro No One Year Data Available