Yellow Media recapitalizes

Yellow Media has published a recapitalization proposal. It needs to be approved by the various shareholder parties before it can commence.

To put a long story short, if you were to purchase preferred shares (specifically the “A” series) and the common shares the day before this was floated, you would have made out like gangbusters today.

The surprise here is that the common shareholders and preferred shareholders get quite a bit of value relative to previously trading market values. This is probably structured as such to get the entire proposal passed in a shareholder vote.

Unsecured subordinated debenture holders will, to use less than polite terminology, get screwed – about 0.39% of the shares of the new entity. They are able to get pillaged because of the structure of the recapitalization vote – they are either lumped in with the medium term note/credit facility holders, or lumped with the common/preferred shareholders (if they choose to convert!). In either case they will be dwarfed by a group that has a much higher interest to vote in favour for the restructure.

The debtholders on the top of the food chain will receive 62 cents of debt/cash consideration (48 cents in newly issued debt, 14 cents in cash) plus an 82.6% equity stake in the new company (which can presumably be dumped for some market value). At 12 shares per $1,000 par value, this is around 24 cents extra in consideration, or about 86 cents total recovery. Not bad, and I will see them voting for it. They could get greedy and go for a 100% recovery in bankruptcy proceedings, but this is a much more messy alternative than what is on the table.

The new entity will also have about $850 million in debt outstanding, most of which matures in 6 years. There will be 26 million shares outstanding.

Common shareholders will receive about 10% of the new company, which is a heck of a lot more than they would have had otherwise (zero through a non-structured arrangement) – they will vote yes for the arrangement. Likewise for the preferred shareholders – they receive 7% of the new entity.

My paper napkin calculation suggests that the math behind this recapitalization assumes a $20 share price of the newly issued Yellow Media stock. If this is the case, then present common shares would have a market value of around $0.10/share, and this would also imply the preferred shares are worth… $1.25. They are trading at around half of that right now, and a nimble trader would have been able to make a ton of money on this by reading the 8:45am (eastern time) press release in advance – somebody on the Pacific Coast wouldn’t usually be awake to do, unfortunately.

This implied $20/share value assumes the company’s operational performance remains steady. If their operational performance continues to decline, then this valuation of course gets thrown out the window, so the risk-free trade is not as easy as it may seem. Basically if you weren’t trading the thing in the first hour, there is little point now. Pays to keep awake I guess.