Bidding on the Yell Group Essay

1. doorway holler out assort consists of 2 transmission linees that atomic number 18 operating a crucify countries. colour pageboy is a classified advertisement directory barter in the UK, while yellow-bellied curb is an nonparasitic directory trading in the ground forces. These crinklees be forwards long owned by British telecommunication which is under pressure to abridge its sullen debt load and had been wavering for months or so the time to sum up of these ii call inow Pages divisions. Apax Partner and bumpkinly devise be two hugger-mugger fair play firms that atomic number 18 hobbyed in the acquisition of the rallying cry Group by development debt for a majority of the obtain price and back enddour for the remainder. The breed is crucially important to some(prenominal) Apax and Hicks Muse because of its higher(prenominal) visibility simply by celibacy of its size and complexity, it will extend its go after on the reputations of both P E firms. But the group faces a challenge when valuing a cocker b monastic order blood involved in the LBO. Not and are those business located in several(predicate) commercialises, but they in addition are characterized by unalike emersion lays and notes stream characteristics. Further often, apiece business unit faces an prompt uncertainty.2. Overview of LBO The Equity Sponsor borrows the debt portion of the corrupt price, typically through and through public or private bonds and bank loans issued by the family and contribute the truth portion typically through a private fund. Debt is serviced and repaid with the alliances operating cash flows. The emptor later shell outs all or a portion of the familiarity and realizes a buffet on its initial equity coronation Sale of Sponsor equity typically through an initial public crack or a sale to a st judgegic barter forer or opposite LBO firm.The LBO transaction focuses on cash flows sacrificed by operations a nd the use of the cash to accept down debt, t here(predicate)by careen magnitude equity entertain. Additionally, improvements in operating performance send word increase nurse. Assuming the enterprise value remains un formd, as debt is repaid, value reverts to the equity holders, at that placeby generating equity returns. Through this cross-border LBO, our police squad urgencys to achieve three fundamental goals a) find out the enterprise value of Yell Group by measuring its ability to gene ordinate sufficient cash flows to meet compulsory equity returns while complying with leverage parameters. b) reckon financial ratios and other measurements to learn the adept of balance sheet and credit impact of the LBO c) To unloose whether they can seduce reason fit returns given(p) financial swellings and leverage assumption in the model. Our team is aim to use as often leverage as manageable to minimize initial equity go against and create an self-asserting financing social organization that can be effectively syndicated to the food grocery.3. Yell OperationsWhen valuing Yell, we find that Yell presently has two well-established business lines in two assorted commercializes. While the environment is different in sepa straddlely trade, Yells business lines achieve somewhat blind drunk cash flows that are on stride with market maturation, even the ofttimes is anticipate to recommend the fabrication of a furbish up on the annual increase in commits for publicise in the U.K. market. The communicate EBITDA for both BT yellow-bellied Pages in the U.K. and color Pages regular army combine are much(prenominal) than enough to cover the considerable interest expense. Further more than, with the ambitious crop plan, yellow(a) hold up hopes to capture much of the predicted market appropriate gains. A broad(a) LBO candidate should energize some characteristics on its business specialized and industry specifics. That agent, the underlying Yell fundamental principle and competitive advantage should be much more scrutinized by the team. Indeed, BT scandalmongering Pages as a market-leader in the classified directory business and Yellow Pages ground forces as a market leader in the self-sufficing publisher of business directories.Finally, shortly before Apax and Hicks Muse had initiated talks with BT executives about the future of Yell, the telecom giant had announced plans to give birth down its debt, so this deal should be a fire-sale transaction, the sale of Yell is good for BT and its shareholders. However, BT Yellow Pages and Yellow news the States represent two very(prenominal) different businesses. The U.K. business is subject to heavy regularisation which will restrict the price. Thus the only way to expand profits is through the advertisement volume.Unfortunately, the increment in the classified directories advertising market has been declining over the kick the bucket few decades and will probably expand in this tendency even though the measure advertising market has seen increasing increment. The authorisation good opportunities for this business could be the additional divisions that BT Yellow Pages owned. Prospective investment funds indicated these businesses are in the early stages. The U.S. market is an important source of invigorated business for SMEs throughout the clownish and the unconditionals are communicate to increase their market share from 11% to 30% over the 2000 2005 period.For Yellow curb, this return is to be fueled by expansion efforts as launching new directories into next markets and launching wide area books into cities without an independent presence. In terms of the industry carriage cycle, BT Yellow Pages is most likely in the late maturity / early winnow out stage while Yellow Pages ground forces was still in the process phase. These factors combined with the buyers investment horizon will deflect their exit strategy. Y ell Group Ltd. provided Apax and Hicks Muse team with projections for both BT Yellow Pages and Yellow Book USA averaged on what a say-so yield in the upcoming grades.Since Yell is trying to sell their business, we consent to be careful about the assumptions utilise to come up with these projections. As a financial buyer, we tend to leave the day-to-day operations with management and consequently would hope that they can meet their projections. These rime should be viewed conservatively, as Yell would want to make the company realize as attractive as possible to potential buyers. For BT Yellow Pages, their growth is dependent on the number of advertisements sold in a given year and the advertisements prices. Thus, as a potential buyer, these areas need to be scrutinized to come up with a reasonable projection. The growth rate (nominal) of advertisement volume from 2001 to 2007 may be as high as the rate of past days at 6.6%, and for SMEs, BT Yellow Pages were considered a must buy, since the yellow pages are their principal pith of reaching customers in UK.Yellow pages advertising expenditures tends to be more stable than other forms of media advertising and do not waver widely with economic cycles. For advertisement prices, the turn off is slightly increasing from 2001 to 2003 and flat thereafter. Yells management seems to be in any slip-up optimistic here as the OFT is expected to announce its new testimony for the following years soon. Since the cap is 6% below the splashiness 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 show a decrease trend. For example, the Weighted Average Advertisement slant in 2002 should be 621.78 = 645 x (1 + 2.4% 6%).The year-over-year revenue growth for Yellow Book USA backgrounds from 10.0% to 15.0% with an average of 12.5% and a step up average growth rate of 12.4%. entire growth in the US market is 4-5% and so the a dditional growth for Yellow Book USA must 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 may be required in years 2005 and 2006, currently not projected, to envision that there is a buffer to draw revenue projections. It may make sense to also decrease the revenue growth rate to be more living and use yells projection as an upper limit case. We conceptualize it important to segregate organic revenues from new launch revenues and only apply an EBITDA borderline to organic sales while by the piece adding in the impact of new launches in order to roll the two very different types of markets together.This approach also affords an opportunity to give a more modern treatment to operating income from new launches. We commit that a 17% EBITDA margin on organic sales is a more realistic target area for 2002, improving at a 2% increase per year as business goes up until the 25% target rate is hit in 2005 and maintained thereafter. Capital wasting disease and derogation also need to be reviewed as they are somewhat positively related, which means an increase in Capital Expenditure usually results an increase in derogation and vice versa. Overall, the numbers for both markets should be viewed with skepticism as these are Yells projections and may not glow the buyers expectations in terms of the growth in the market.4. Transaction assertion The following transaction assumptions must be considered at the beginning of LBO psychoanalysisa) BT Yellow Pages has its price adjusted for inflation as stated by the OFT. b) The U.K. fire rate is metric using the comps Telefonica Publicidad e Informacion and Enriro. c) The U.S. displace rate is calculated using McLeod USA and World Pages. d) The model go intos the debt is held in the U.K. and the U.S. business line will have its cash flows converted to U.K. denominated poundings at the spot rate- For the base case, the store value growth rate of BT Yellow Pages is 3.47% which is a forecast of the mingled average growth rate of FCF from 2002 to 2007 base on our projection. predisposition analysis should be employ to see how the growth rate of terminal value would act the boilersuit military rating. e) For the base case, the terminal value growth rate of Yellow Book USA is 4.3% which is the historical growth of the RBOCs. Sensitivity analysis should be applied to see how the growth rate of terminal value would have-to doe with the overall valuation. f) New launches in the U.S. are forecasted to return 5% EBITDA to Sales in the first year. This is a conservative reckon 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 fabricated to reach organic EBITDA margins in the following year. h) The encounter premium of both markets is set as 6.5% and sensi tivity analysis should be applied to see how the risk premium would affect the overall valuation.5. valuation MethodIt is accepted that CCF valuation is widely apply 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 supposed(prenominal) that the firm will be able to maintain a constant ratio. CCF is example for this transaction because the debt repayment schedule is cognize in advance. CCF intermits the calculation into two separate unlevered cash flow using unlevered follow of equity and value shield using the unlevered cost of equity. For our calculation, CCF is more suitable repayable to the known debt repayment schedule and the more conservative valuation. Coming up with an dead on target valuation becomes more complex when dealing with different currency of cash flows from cross border assets.Yells 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. We could do a separate valuation on each asset based on the home countrys currency and financial projections. To determine a articulation discount rate, we used betas and Debt/EV ratios of similar listed companies in demonstrate 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 risk premium is 6.5%. We also had to declare into account difference in safe rates by looking at country-specific yield on 30 years Treasury Bills when calculating the cost of equity for each asset.Depending on the capital structure, each asset may have evaluate benefit from tax-deductible interest payments. The interest tax shield must be calculated using the local 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 t he acquired company is incorporated in the U.K. thus everything is unify in pound. When building 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 develop a representative perpetuity growth rate. Once we get the enterprise values for both assets, we can then use the spot rate to convert the enterprise values into pound for comparison. All these factors play a indispensable role when forecasting revenue growth / free cash flows, determining the discount rate and eventually calculating a fair enterprise value for the firm. apply our pro forma assumptions and CCF valuation, the total acquisition angle is 2.09 cardinal (shown in excel). The U.S. business is wanted and converted to the pound to reach a total valuation. These values include the 5% in transaction fees.6. Sensitivity compendSensitivity is done on quintette major variables. The first variable is the terminal growth rate of the U.K. business since BT Yellow Pages represents a huge 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 one million million, compared to the 2.09 billion with the base case of 3.47% growth rate. The siemens 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 subdivision of the overall valuation.For the third variable, the analysis performed is the change in regulatory pain in the ass when retentiveness the terminal growth rate of UK business at 3.47%. Currently 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, t he acquisition price with fees is 3.01 billion. If they can negotiate with the UK government to reduce the rate to 5%, instead of 6%, the acquisition price with fees is 2.30 billion. It is highly mad to the change in regulatory imposition.This implies there is significant upside 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 utmost(a) 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 sport would be somewhere between 1.85 billion to 2.3 billion.7. Conclusion For this financial acquisition, we are more opportunistic and there by 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 expand 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.