YLO: DBRS Confirms Rating on Asset Sale

Yellow Media has announced:

that it has reached a definitive agreement to sell Trader Corporation (“Trader”) to funds advised by Apax Partners for a purchase price consideration of $745M. Closing of the contemplated transaction is expected to occur in June 2011, subject to regulatory approvals and other customary conditions.

The purchase price consideration of $745M, subject to working capital and other adjustments, will be payable in cash at closing. The transaction has fully committed financing, consisting of equity provided by Apax Partners and financing commitments provided by RBC Capital Markets. The proceeds from this divestiture will be largely used to reduce indebtedness and for general corporate purposes.

Concurrent with this announcement, Standard & Poor’s and DBRS confirmed their credit ratings for Yellow Media Inc.

DBRS has announced that it:

has today confirmed the ratings of Yellow Media Inc. (Yellow Media or the Company), including its Medium-Term Notes at BBB (high) and Commercial Paper at R-1 (low), following the announcement that it has reached an agreement with Apax Partners to sell the automotive assets of Trader Corporation (Trader) for a purchase price of approximately $745 million. The agreement includes the sale of Trader’s print and online automotive businesses and its 30% stake in Dealer.com (results were consolidated). The trends are Stable.

The confirmation of Yellow Media’s ratings reflects the following:

(1) An acceleration of the Company’s goal to improve its financial risk profile as DBRS expects cash proceeds of approximately $745 million from the sale of Trader’s automotive businesses (the majority of its Vertical Media segment) to be mainly used to reduce debt.

(2) Its leading position in Directories, the Company’s principal segment, and the significant risks this segment continues to face as it transforms itself from a print-placement organization into an online/digital media and marketing service provider.

I would not ordinarily consider an affirmation to be worthy of comment, but there is a story in today’s Globe by John Heinzl titled Yellow Media’s dividend under the microscope:

Since peaking at more than $17 in 2006, the shares have plunged nearly 70 per cent, closing Thursday at $5.29. Adding to the pain, the directories publisher has chopped its dividend twice as it grappled with the financial crisis, its transition from print to digital media and a recent conversion from an income trust to a corporation.

Now some investors are asking: Is another dividend cut in the cards? The sky-high yield of 12.2 per cent isn’t a comforting sign.

The company doesn’t have a lot wiggle room with its credit ratings. Standard & Poor’s rates Yellow Media’s senior unsecured debt at triple-B-minus, which is one notch above speculative status. DBRS rates it triple-B (high), which is three notches above speculative.

Underlining the dangers, S&P has said it would like to see Yellow Media reduce its net debt by $450-million this year and that “downward pressure on the ratings would likely come from a failure to reduce debt levels as noted … as well as a failure to improve adjusted debt leverage as targeted.”

The company has been repurchasing its preferred shares:

Under its normal course issuer bid, Yellow Media Inc. intends to purchase for cancellation up to but not more than 1,174,691 and 720,000 of its outstanding preferred shares, Series 1 and preferred shares, Series 2, respectively, representing 10% of the public float of each series of preferred shares outstanding on June 8, 2010

During 2010, Yellow Media Inc. purchased for cancellation 635,714 preferred shares, Series 1 for a total cash consideration of $15.8 million including brokerage fees at an average price of $24.78 per share and 501,490 preferred shares, Series 2 for a total cash consideration of $10.4 million including brokerage fees at an average price of $20.79 per share. The carrying value of these preferred shares, Series 1 and Series 2 was $15.7 million and $12.3 million, respectively. A gain of $1.8 million was recorded in net earnings in financial charges.

Since June 11, 2009, the total cost of repurchasing preferred shares amounted to $39.9 million, including brokerage fees.

The company has four public issues of preferred shares outstanding:

YLO Preferreds
Ticker Quote
YLO.PR.A 24.85-90 4.57% Soft Maturity
YLO.PR.B 19.95-00 9.37% Soft Maturity
YLO.PR.C 23.38-43 7.18% Limit Maturity
YLO.PR.D 24.55-74 6.95% Limit Maturity

YLO was last mentioned on PrefBlog when the ticker changed from YPG.

Update: Tom Kiladze of the Globe comments in Yellow Media buys some breathing room:

As for the deal metrics, the assets are getting sold for $745-million, but all together they were acquired for about $1.2-billion, according to Desjardins Securities analyst Maher Yaghi. He also noted that the divested assets generated about $69-million of EBITDA last year. That translates into a 10.8 times multiple for the sale, better than Yellow Media’s current market multiple of 6.7 times.

Yellow Media also indicated the Trader Corp. assets were sold for about 10 times EV to EBITDA, equating to $600-million, while the Dealer.com stake was sold for about 15 times, amounting to the remaining $145-million of the total price, Mr. Yaghi noted.

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