Should have been a lawyer

The only winners from Yell's pulled flotation seems to have been the lawyers and accountants. And the question now is when and how the directories business will provide an exit for Apax and Hicks, Muse. Breakingviews reports.


Should have been a lawyer

Yell: Yell's telephone directories may be a healthily growing business, but it looks like the law and accountancy beat it hands down for fast cash generation. Nearly £15m of Yell's £31m first-quarter loss went into the pockets of the professionals who helped it prepare its ill-fated IPO. Only the poor old bankers at Merrill, Goldman, and JP Morgan were hoist with success fees and had to flee the scene empty-handed.

The rest of Yell's loss highlights the limbo it has been left in by losing the chance to float. Stuck for longer than it would have liked with the highly-leveraged structure put in place by its venture capital owners, Apax and Hicks, Muse, its annual interest costs are running at £150m. That inflated debt service may condemn it to net losses for several quarters yet.

Not that the VCs need worry. Yell's business is a cash-generating machine. In the UK, it grew revenues 6.3% despite a regulatory price cap of inflation minus 6%. In the US, even excluding the acquisition of McLeod during the quarter, sales rose strongly, too. And that means that even after deducting interest and capital spending, Yell generated free cash flow of £33m. At that rate, if they have to wait a long time before taking a second shot at a flotation, Hicks, Muse and Apax can at least benefit from some meaningful shrinkage of the company's £1.7bn of interest-paying debt in the meantime.

Their wait may be a long one. Qwest's US directories business has just fallen to a venture capital buyer for 7 times its ebitda. Now Qwest-Dex is one of the big incumbents that Yell's independent US directories are stealing market share from, so its growth prospects are probably worse than Yell's. That might support the case for rating Yell at a higher earnings multiple. But Hicks, Muse and Apax were adamant in June that the business wasn't worth selling for less than 8.7 times ebitda. Current equity markets will be giving them no encouragement to try again soon.



Author: Paul Raynes