Mellow Yellow

Yell is looking to carry off an IPO before the summer. What might investors expect to get? Breakingviews takes a look.


As anticipated, Yell is joining the group of brave companies aiming to carry off an initial public offering before the summer holidays. The transatlantic directories business is aiming to raise £750m though a primary share sale, with perhaps a secondary offering on top if investors have the appetite. What might those investors expect to get for their money in today's uncertain IPO climate? Quite a decent slice of Yell's equity, by the looks of things.

The company is both highly leveraged and owned by private equity interests so the starting point is to value the enterprise – including both its debt and equity capital. Yell is shooting for a £4bn valuation. But it is likely to get less than that. The group's European quoted peers, Eniro and TPI, currently trade at an enterprise value near 10 times their forecast 2003 ebitda. Yell makes comparable margins, and generates healthy cash flow. It also has a tidy growth story to tell, thanks to the burgeoning market share of independent US directories businesses like its Yellow Book and McLeod. Set those plus points off against the customary IPO discount and the fact that this is a buyer's market, and Yell would probably be fairly priced at 10 times ebitda, or £3bn.

How much of that enterprise value would belong to the equity holders? Yell's pre-IPO debt is £2.5bn, but some of that is deep-discount bonds owned by its venture capitalist shareholders, which they intend to convert into equity. Of the IPO proceeds, £600m will be used to pay down debt, too, leaving the company with £1.2m of ongoing borrowings. Deduct all that and the equity would have a value of £1.8bn of which 42% would belong to the new shareholders.

Things don't look bad for the private equity investors – Apax and Hicks Muse – either. Their share of the company – the balance, less a 7% management stake – would be worth £1bn. Compare that to the £625m they initially put in, and they will have made a very respectable 60% turn on their investment of a year ago. The existing capital structure also gives the majority of Yell's cash flow to its bank lenders. Reducing its leverage will divert an extra £50m a year from the banks to the shareholders. Despite all the nasty mood music in the IPO market, floating now looks like a smart move from the latter's point of view.