Yellow divests a business

I don’t have enough time to fully write about it, but here are some low quality notes for Yellow Media (TSX: YLO).

Yellow Media announced they are divesting their LesPAC Inc. business unit for $72.5 million in cash. The company basically operated a craigslist-type pour les Quebecois, pardon my mauvais Français! The company generated $12.7M in revenues for the 2010 fiscal year, so on first glance, a sale at 5.71 times revenues seems good. It would probably be a more depressing figure how much they spent to build the service, so it wouldn’t surprise me in the least that with the disposition of that business there would be another chunk of goodwill and intangibles off the balance sheet if they did have to purchase some technology in order to build the site.

Now if they can just sell the rest of their business at 5.71 times revenues, then they won’t have much of a debt problem anymore. Equity holders will get $15/share and everybody will be happy. Don’t hold your breath.

That said, $72.5 million is not an inconsiderable chunk of change and increase the chances the company will be able to chip away at its credit facility due February 2013. Preferred shares C and D are trading a shade lower, yielding 38% at the bid, while debentures are trading a shade higher on reaction to this news at roughly 29 cents on the dollar. The market continues to be deeply skeptical on the ability of YLO to pay back its debt and obviously this depends on whether the “transformation to digital” will be a profitable one or not.

9 thoughts on “Yellow divests a business”

  1. One other quick note.

    On September 30, 2011, YLO had $35M in commercial paper outstanding and $52M in cash. The CP facility will have had to be paid by November. The bank facility has a revolving and non-revolving component – $250M in the non-revolving and $16M in the revolving component. This sale of LesPAC will have to be completely applied to the $250M non-revolving facility, so this will be down to $177.5M. This amount cannot be re-borrowed.

    The interest reduction will be about $2.4M/year saved on an after-tax basis.

  2. Hi Sacha,

    An interesting note is that YPG had said they will use 25 Million for development and the rest to pay down debt from the sale of Les Pac. I believe this is in Les Affaires. I am a bit surprised as by my calculations with the info I have they could have started buying the 2013 MTN’s. Using the 72 plus 3 million more. Also, they do not have to pay off the 16 million of revolving LOC as long as 125 million is in the account when they buy so they could buy up to 109 million. They do have to pay the commercial debt this month but one hopes they made enough money in Oct and Nov to cover this. Maybe I am being optimisitic but perhaps the debt issue is not as bad as it was?

  3. Their debt issue is bad. I would not call it “very bad”, but suffice to say, as long as they have money outstanding on their credit facility, the banks have successfully put a noose around YLO’s neck and are tightening it until they have received full payment. I do believe they will be made whole.

    They can only start chipping away at the MTNs if they satisfy “certain conditions” per their restated credit facility. Unfortunately, when you read the restated credit agreement, it depends if YLO is outperforming this secret “budget” they submitted to the creditors in September, IN ADDITION to paying off $75M of the non-revolving facility which they have not done yet.

    Practically speaking this will not be happening until 2012 at the earliest or if they can make another significant divestiture.

    I’ll give you the ugly paragraph here:

    9.9 Limitation on Restricted Indebtedness
    The Borrower shall not pay or prepay any principal or interest on any Restricted
    Indebtedness provided, that, for so long as no Default or Event of Default has occurred and is
    outstanding or would arise as a result of such payment of interest, the Borrower may make
    scheduled payments of interest on any Restricted Indebtedness and provided further that the
    Borrower may deploy an amount not exceeding $125,000,000 in repurchasing the 2013 MTNs
    provided, at the time of any such repurchase,

    (w) the Consolidated Total Debt to Consolidated
    EBITDA Ratio most recently reported by the Borrower to the Administrative Agent pursuant to
    Section 8.1(a) or (b) is less than 3.25 to 1,

    (x) EBITDA for the Test Period most recently
    reported by the Borrower to the Administrative Agent pursuant to Section 8.1(a) or (b) is no less
    than the projected EBITDA for such Test Period as set out in the September, 2011 Projections
    (as supplemented by a quarterly breakdown of EBITDA which supplement shall be delivered by
    the Borrower to the Administrative Agent on or prior to October 30, 2011 and which quarterly
    breakdown shall be consistent with the September, 2011 Projections),

    (y) at least $75,000,000 of
    payments or prepayments have been made by the Borrower with respect to the NRT Facility
    without the Borrower drawing upon the Revolving Facility to make all or any or part of such
    payments and

    (z) there would remain (after effecting such repurchase) at least $125,000,000 of
    undrawn availability under the Revolving Facility. For certainty, the preceding sentence shall
    not prohibit the payment or prepayment of principal or interest on any Restricted Indebtedness
    solely with the Capital Stock of the Borrower.

  4. Thanks for your reply.

    I read the covenants and other than the secret budget (which I have no idea) I think the others are or could be met. The way the 75 million works is they can prepay anytime, however they still have to pay the 25 million installments at the quarter.

    So here are the questions and the unknowns:

    Are you certain they have not paid towards the non-revolving LOC? The only way I would know is if they post purchases on SEDI of 2013 MTN’s.

    How much cash flow are they really making. EBITDA less taxes and interest is much higher than the Free Cash Flow number. Which one should be used and really would like to know how much of cash earned is being used to pay down debt.

    The debt they can pay stands at September 30 as 16 million on the revolving LOC. 35 million on the commercial paper that is to be paid in September and the non revolving LOC of 250 million which when due in 2013 will be 125 million at the most.

    To my original question, why did they not use the proceeds to pay down the non-revolving LOC so they could start purchasing the 2013 MTN’s at .75 to .80 on the dollar? There are multiple choices on this one. As it could be the secret budget is not met. They already have paid as much as they can so put the rest to expedite some of the projects they talked about doing on the conference call or some other actions.

  5. With the LesPAC sale, a minimum of $72.5-25=$47.5 goes to the non-revolving facility.

    Free cash flow is the important number as you are implicitly asking how their “digital transformation” is going. They did $28M in Q3, and in 2012 this will be hampered by income tax pre-payments.

    The CP ($35M) has to have been paid off by November and is no longer accessible as their credit rating no longer allows them to do this.

    They can’t pay MTNs simply because their credit facility will not allow it. Banks are first in line, and this agreement ensures they will be paid first so they can wash their hands of YLO without having to take losses. Subordinate holders (e.g. MTN holders) are next in line in the risk chain.

  6. Just a point of clarification from IR. If they prepay the 75 million and meet the covenants they can borrow on the revolving LOC up to 125 million of cash to buy 2013 MTN’s as long as the amount available after purchase is 125 million (that is why I said 109 which is 125 less the 16). I can forward their response if you like. It may be that one of the covenants has something in it but if they prepay the 75 it was clear that convenant would be met.

    The tax is another issue or problem.

  7. Here is the exchange:

    John,

    Hope you’re doing well.

    If all conditions mentioned below are met, we may pull on the revolver to purchase $125M of the 2013 MTNs. However, if this course of action is taken, the resulting undrawn portion of the revolving facility cannot be less than $125M.

    We always maintain discussions with our credit rating agencies; however, I cannot shed color on precise requirements.

    Hello Amanda,

    Thanks for your prompt reply. I apologize but I do have 2 more questions.

    First, once the conditions are met as below, can you borrow against the revolving LOC to buy the 2013 MTNs?

    Borrower may deploy an amount not exceeding $125,000,000 in repurchasing the 2013 MTNs
    provided, at the time of any such repurchase, (w) the Consolidated Total Debt to Consolidated
    EBITDA Ratio most recently reported by the Borrower to the Administrative Agent pursuant to
    Section 8.1(a) or (b) is less than 3.25 to 1, (x) EBITDA for the Test Period most recently
    reported by the Borrower to the Administrative Agent pursuant to Section 8.1(a) or (b) is no less
    than the projected EBITDA for such Test Period as set out in the September, 2011 Projections
    (as supplemented by a quarterly breakdown of EBITDA which supplement shall be delivered by
    the Borrower to the Administrative Agent on or prior to October 30, 2011 and which quarterly
    breakdown shall be consistent with the September, 2011 Projections), (y) at least $75,000,000 of
    payments or prepayments have been made by the Borrower with respect to the NRT Facility
    without the Borrower drawing upon the Revolving Facility to make all or any or part of such
    payments and (z) there would remain (after effecting such repurchase) at least $125,000,000 of
    undrawn availability under the Revolving Facility. For certainty, the preceding sentence shall
    not prohibit the payment or prepayment of principal or interest on any Restricted Indebtedness
    solely with the Capital Stock of the Borrower.

    The second question is regarding credit status. Are there criteria that YPG has been told to meet to regain investment grade status?

    Thanks again,

    John

  8. Thank you for this supplementary information. Yes, they can pull money from the revolver, but keep in mind they need to have enough cash in store to pay $25M quarter to the non-revolving line.

    I just don’t see them aggressively buying back MTNs unless if they have a clear excess of cash. At that point, the near-term MTNs are going to trade close enough to par that it won’t be much of an event financially.

    I am wondering how much YLO can retrieve if they sold redflagdeals.com. They are obviously trying to gear that into a Groupon-type setup and given Groupon is at 16 billion market cap, it makes you wonder.

  9. Thanks again for the reply,

    I think you are right about the buyback. I think the notes are 80 cents on the dollar and rising.

    I looked over the Free Cash Flow numbers and they have changed the line items from Q2 to Q3. In addition to financial charges they have a line item called interest paid (which was -49 million). I am no accountant so I am confused by this number. I think the real number is in the 30 million range (not including all the buybacks). Something was mentioned on the conference call about IFRS and some changes. I don’t know if it is related.

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