Tag: Y

By virtue of two mandatory share redemptions (post 1, post 2) and some other dispositions, my position in this company is a lot less than it used to be (which at one point was over 10% of my portfolio!). However, what is remaining is not an insubstantial sum as measured in dollars and cents and I also have some sentimental value with this company as I regard it as one of my best calls ever which I made public on November 2019. Indeed, it is my longest-dated portfolio holding.

Other than capital return decisions (which has reduced the company’s shares outstanding from 26.6 to 14.2 million), the other significant event appears to have happened on March 21, 2023:

On March 21, 2023, the Company was the target of a cybersecurity incident. The Company immediately activated its internal network of IT professionals and retained the services of cybersecurity experts to assist in securing its systems and to support its internal investigation. The Company also suspended its operations and IT systems to contain the situation.

As of May 10, 2023, the Company had restored all its operations and IT systems and has taken steps to further secure all systems to help prevent a similar occurrence in the future. The Company is working with its insurance providers to make claims under its policies.

In their Q2-2023 release, they stated when discussing their decline in revenues:

… (b) a cybersecurity incident which resulted in the Company’s operations and IT systems being suspended for approximately three weeks of the second quarter of 2023.

While this did not have a material impact on Q2 (I was jokingly thinking that the company is so old-school that it generates cash even when they don’t have any computers operating), it certainly had an impact on Q3’s metrics, which significantly underperformed the decline regression model I had.

Now that this incident is over with, presumably the company can get back to its regular decline.

The only difference is that instead of working with a base of 26.6 million shares outstanding, there is about 47% less shares out there to deal with.

Management explicitly wanted to get the last buyback out of the way in calendar 2023 because of the 2% buyback tax that was going to be imposed in 2024. It would suggest that future buybacks are unlikely – perhaps this is why the stock is edging down lower due to the lack of anticipation of future demand.

This is an odd case where a company has removed nearly half its shares outstanding, but the share price has actually decreased despite the underlying financial metrics being relatively stable (the graceful decline downward). The company continues to trade at less than 4x cash generation – if there is any hints that profitability will stabilize, this multiple will rise. This has always been the thesis and 2024 is probably a good a year as any to see if it occurs. If there was ever a case study to deal with a company that should just go private to alleviate itself from public company hassles and expenses, this one is it. In the meantime, the dividend yield is around 7.5%, so at least we’re being paid a few bucks to wait for the inevitable.

Some history – last year, Yellow Pages announced a $100 million share buyback at a set price and shareholders almost unanimously agreed to a pro-rata buyback at $12.58 per share. They bought back 7,949,125 shares and at June 30 they had 26,607,424 shares outstanding. I wrote a little about it here.

Fast forward to today, and we have the following announcement:

Yellow Pages Limited (TSX: Y) (the “Company”), a leading Canadian digital media and marketing company, today announced that the Board has approved a distribution to the Company’s shareholders (the “Shareholders”) of approximately $50 million by way of a share repurchase from all shareholders pursuant to a statutory arrangement under the Business Corporations Act ( British Columbia ). The arrangement will be effected pursuant to a plan of arrangement (the “Arrangement”) which provides that the Company will repurchase from Shareholders pro rata an aggregate of 4,440,497 common shares at a purchase price of $11.26 per share, which represents the volume weighted average price for the five consecutive trading days ending the trading day immediately prior to October 19, 2023.

Yellow has 18,658,347 shares outstanding as of June 30, 2023, so this share buyback will result in a reduction of 23.8% of shares outstanding and bring them to about 14.2 million shares. At June 30, 2023 they had $64 million of cash on the balance sheet.

In the past four quarters, they have been able to generate $90 million in adjusted EBITDA, or about 1.6 times EV/EBITDA. The ITDA is about $10 million and the large cash drain has been the maintenance of the corporate pension plan which is still listed as a $37 million net liability, but this is slowly getting rectified.

Here is the really interesting proposition – the dividend is currently a $3.55 million quarterly cash outflow. The company is easily generating enough cash to cover the dividend. After the buyback is concluded, the 20 cent quarterly dividend could be raised to 26 cents per share and be cash neutral. At 26 cents per share, the company trades at a 9.2% yield. This is going to be difficult for algorithmic traders to avoid especially considering that the “melting ice cube” business is not melting nearly as quickly as one would expect, considering it is the Yellow Pages, after all.

If Yellow manages to generate another $80 million adjusted EBITDA over the next four quarters (this is not a given – my own model has them closer to $75), about $55 million of that will be pure cash flow and they’d be able to repeat this same maneuver again in 2024. If their stock price doesn’t move from there, another $50 million buyback would render the dividend yield at 13% – would the market be able to resist?

The funny thing is that there is a low enough price that one would actually want to purchase more Yellow Pages. Good luck, however – it takes about 2,000 shares of trading to move the stock price 70 cents per share!

I have had countless amusement and bewilderment, not to mention immediately dismissive and credibility-destroying reactions when telling people this is my longest lasting investment currently in my portfolio. For good memories, read my coming out of the Yellow Pages closet here.

Yellow Pages (TSX: Y), a long-time holding of mine, announced their second quarter results a couple weeks ago.

There were some interesting highlights involved, namely that this quarter was the first quarter in a very, very, VERY long time where they had a sequential increase in revenues between quarters (albeit, the profitability of such revenues decreased as the mix had more lower margin revenues). This got very little recognition.

The actual cash generation figures have still been quite healthy, although this is the first full year where Yellow’s tax shield has whittled away to only partially offset their income. By virtue of making some seriously questionable past acquisitions (before the belt-tightening regime of the existing management) they are allowed to deduct a declining balance amount on their cumulative eligible property, which is better than nothing.

However, the highlight is what is essentially a forced share buyback:

The Board has approved a distribution to shareholders of approximately $100 million by way of a share repurchase from all shareholders pursuant to a statutory arrangement under the Business Corporations Act ( British Columbia ). The arrangement will be effected pursuant to a plan of arrangement which provides that the Company will repurchase from shareholders pro rata an aggregate of 7,949,125 common shares at a purchase price of $12.58 per share, which represents the volume weighted average price for the five consecutive trading days ending the trading day immediately prior to August 5, 2022.

The proposal requires 2/3rds of the shareholders to approve, but they already have consent from the three major shareholders (GoldenTree with 31%, Empyrean with 24% and Canso with 23%) to proceed. Minority shareholders (such as myself) are along for the ride, although because the buyback is proportional, no entity will have a different level of ownership after the transaction (restricted share units, options, etc., typically have clauses to reflect such special distributions).

At the end of June 30, Yellow had 26,607,424 shares outstanding. This works out to a distribution of $3.76/share.

The way I understand it, instead of the entire amount consisting of an eligible dividend, it will effectively amount to a sale of 30% of the stock, which means that the cost basis of such shares can be deducted against the proceeds of the sale (for most people, this will be a capital gain). If my understanding of the tax treatment is correct, then the tax burden of such a distribution will be significantly less than the typical special dividend.

However, in the letter to the three top shareholders, the following paragraph is in there:

The Company agrees that it shall designate the full amount of any dividend deemed to arise under the Income Tax Act (Canada) as a result of the acquisition of the Common Shares pursuant to the Arrangement as an “eligible dividend” pursuant to subsection 89(14) of the Income Tax Act (Canada) and the corresponding provisions of any provincial tax legislation pertaining to eligible dividends.

As those three entities own more than 10% of the common stock of the company, such a distribution would be tax-free if given to their CCPC subsidiaries if classified as such. I am not sure whether differential tax treatment is permitting. When the company’s management information circular comes out, reading the tax opinion will be educational as I have never encountered this ‘forced buyback’ in my investing life.

The trading of Yellow Pages (TSX: Y) over the past week has been a relatively fascinating display of liquidity – and indeed because the publicly traded float is so tiny and volume so low, that you can review it trade-by-trade and get some insight on what is going on.

This chart does a poor job of illustrating the tick-by-tick price action of the stock.

Supply is being sucked out of the market by ETFs and algos, plus the fact that Yellow is trying to pull supply out of the market through their NCIB (limit: 2,510 shares daily). There is little demand from the short squeeze angle (short interest is about 11k shares). Although the borrow is available (IB shows 1.77 million shares available to be shorted) it is very expensive presently (30% to short). What’s really interesting are the blocks on display:

Monday (all times Pacific time zone):
12:29 Ask 5,100 @ 11.95 (not filled)

Tuesday:
Same block on the ask, trading was thin this day

Wednesday:
The block at 11.95 disappeared, and instead at the beginning of the trading day, Ask 10,000 @ 12.00. There was a bunch of volume at 11.95, and somebody front-runned the large ask by a few pennies with obvious volume.

Thursday:
The big day. Opening was Ask 10,200 @ 12.09, and there was a sizable bid (Bid 2,900 @ 11.95) which crept up in price over the next four hours. At 12:46 the block was hit, preceeded by some volume before that. The largest trade of the week was hitting the ask at 12:46:36 for 12,460 shares (multiple trades).

Friday:
A bidder appeared at 6:32 at 12.19 (1,600 shares) and this rose over the next couple hours to 12.50 (about 3,967 shares traded from the opening $12.00 to $12.50 at 7:47am). Subsequently some supply hit the market at 9:42 at 12.47-12.52, but this was quickly absorbed. From 9:57 to 12:12, there was some liquidity trading at the 12.50-12.60 level (somebody posted an Ask 5,000 @ 12.50 which was eaten in the course of an hour) and subsequently 14,740 shares traded.

At 12:12:44, somebody posted Ask 10,000 @ 12.74, and it took all of ten seconds before somebody hit the ask and picked up the shares (with 501 hidden shares at 12.70, specifically the 1 share trade was probably for the HFT processor to deliver the information before the remainder of the order was filled).

The bidder after this trade continued to increase the bid, and hit some more supply at 12.80 at 12:21:01, and finally continued to 12:59:26 where the closing trade was at 13.01.

The total volume for Friday was 35,222 shares traded, the highest since August 27.

It was very interesting week for Yellow Pages, at least in terms of how the stock traded. If they continue to financially perform as they did in Q2-2020, they should rise further. A particular price point is $19.04/share, which is the conversion price of their debentures (TSX: YPG.DB) and although they have the cash already in the bank to pay off these debentures, if the common shares trade above this, it will be akin to them raising equity financing at this price. I do not think most people would have anticipated this, especially in light of COVID-19. I still have a very significant equity position as I believe this will continue higher.