Yellow Media – are they done?

Yellow Media (TSX: Y, and thankfully no positions in equity or debt) reported today what can only be described as a near-disaster of a quarter.

The elephant in the room is what will be (after May 31, 2017) $295 million of 9.25% senior secured notes which mature on November 30, 2018. About 95% of this debt is owned by Canso Investment Counsel Ltd., who also owns 23% of the company’s equity.

In other words, the corporation’s future, short of a surprise turnaround in financial results, completely depend on what Canso’s intentions are. Presently they are able to extract a 9.25% coupon out of the corporation via the senior secured debt and I very much think they would be reluctant to relinquish what is a first-in-line cash stream.

There is a $107 million issue of 8% unsecured debentures trading on the TSX (TSX: YPG.DB) which is also about 30% owned by Canso (maturing on November 2022). The power of this class of securityholder is much more tenuous than it was before Yellow’s recapitalization (in other words – at 98 cents on the dollar it is trading too high given the risk profile). The conversion rate is at CAD$19.04/share which is has little value at the existing equity price of CAD$5.80/share.

The financial situation at Yellow has deteriorated and although they project $50-55 million in free cash flow for 2017, their revenues are continuing to decay and this trend is likely to continue as they morph into a digital consulting firm.

Since their market cap (after today’s 25% decline) is $160 million, it might appear the stock is cheap from a market cap to free cash flow basis. But this is a total illusion for two reasons. One is that the enterprise value of $562 million makes it expensive in light of the decaying free cash flow. The second and more powerful factor is Canso’s control motivation. The return opportunity for shareholders is going to be quite stunted, absent of some surprise takeover bid (doubtful, but this is up to Canso) simply because Canso has too much power and ability to extract capital in what is a financially unfavourable position to Yellow.

This is going to hurt the minority equity holders.

The business story is simple and everybody knows it – Yellow Pages used to be the business Google of the offline world. It is no longer.

No positions, not interested in any unless if somebody wants to sell me that senior secured debt, but sadly Canso owns most of it.