Yellow Pages aftermath

I couldn’t think of a worse stock to be holding (other than cruise ships, airlines and tourism stocks) than the Yellow Pages (TSX: Y) during the CoronaCrisis. It ticks the Corona-Avoidance investment list of “non-essential”, “small business” parameters. On the flip side, the type of work they can do can be done remotely by employees, if they have the right mechanisms for remote work. Not helping is that their headquarters is in Montreal, Quebec, and the province of Quebec is nearly competing with Italy for the COVID-19 management award (for those sensitive readers out there with relatives in elder care homes in Quebec: this is not to make fun of what is going on – it is indeed very tragic, both in Quebec and around the world).

A very smart investor I respect (John Cole) dumped out in early March, noting the stock’s bad liquidity and getting an opportunity to bail out just as the Coronacrisis was coming into full steam, but also citing customer comments over the internet as being incredibly adverse. Indeed, it doesn’t take too much searching to find people incredibly angry at the perceived value they received, coupled with being locked into one year contracts that they can’t get out of mid-term. These concerns came up to me in my initial due diligence screens (indeed, it was pretty difficult to avoid it) but I will just retort with two words – Rogers Wireless. You (mostly) only hear about the complainers that have experienced some sort of injustice (name it – roaming fees, data overages, billing issues, long distance, SMS scams, whatever). This is exactly why every telecommunications company has developed ‘flanker’ brands, so their primary names don’t get sullied (Rogers – Fido/Chatr, Telus – Koodoo/Public, Bell – Virgin, Shaw – Freedom). When you have 153,000 customers with an average annual billing of about $214/mo, you’re going to get some pissed off people over anything, especially if they are sold some $25/mo web package and they don’t discover their sales quadruple overnight.

Some companies have gotten smart about this (“reputation management”) and have started to overtly hire third parties to manage the image of certain brands, by basically spamming the internet with false reviews, and so forth. Explicitly note this is not an accusation of Rogers/Bell/etc. doing this, but in a world where it is perceived that having a positive reputation on Google Reviews, Amazon, Yelp, etc., make a difference, you can be very sure that there will be entities out there that will explicitly game the system.

I even look at people that complain about Interactive Brokers, and having used the platform now for more than 15 years (and still finding it superior to anything I have seen out there, which in itself is an amazing accomplishment), hearing people talk about it negatively makes me chuckle. Questrade has a small staff that is dedicated to their online reputation management. (Indeed, if you want some amusement, go read this Reddit thread claiming the poster lost a bunch of money trading options due to Questrade being down, and apparently at some point the police got involved because he threatened to burn down their offices).

Angry customers love to make noise. They’ve been burnt, it is personal, and emotional, and emotions cause people to do very strange things, some of which gets online. They will do so 10 times, if not 100 times more in magnitude than happy customers will openly praise.

It leads to the conclusion that Yellow Pages’ big mistake on this front was not engaging in more proactive “reputation management”, which is a mild slight against them given that they’re now in that business sector! (Hint hint, if anybody from Yellow Pages executive management is listening, this is a pretty good business segment to get into…)

But anyhow, I go back to the original topic. Prior to Covid-19, and especially after their February quarterly report, all of the stars were lining up on the astrology charts for their stock to break out into the upper teens. It was really obvious. Then Covid-19 hit, and everything went to crap. I managed to get some liquidity on the way down and it is no longer my largest holding, but I do own a moderate amount of stock, although I would have preferred to diversify it into some other holdings, especially in late March and early April. At the price they were trading at those times, there was really no point in liquidating (my estimate had them still worth more).

Also, it was very peculiar that Goldentree Asset Management was purchasing shares of Yellow in the upper 6’s (the last purchase being on April 15) and prior to this they were a 30.3% owner in the company. Were they doing this for value, or were they doing this to keep the asset value on their balance sheet at an acceptable level? One will never know. Although they filed twice to sell shares (February 3, 2020 and March 5, 2020) they never sold any.

What are we going to see in the upcoming May 13, 2020 quarterly report? Oddly, I’m expecting a reasonably decent quarter, but with cautionary notes of collections and uncertainty regarding Covid-19. The biggest problem going forward deals with the following line on their AIF:

Furthermore, the Corporation has entered into Billing and Collection agreements with Bell (up to 2020) and Telus (up to 2031), whereby each performs billing and collection services on behalf of the Corporation, including billing and collecting directory advertising fees from certain Yellow Pages customers who are also customers of the Telco Partners.

Bundling of YPG billings in Bell Canada’s billings ends on December 31, 2020 (page 37 of the MD&A) and most business owners will pay consolidated phone bills, but it is less likely they will pay for separate billings.

A few other notes of mention:

The company on April 15 announced they opened an NCIB to repurchase YPG.DB, which makes sense as they were going to do so at par in May 2021. Might as well do so now (and even at a mild discount) and save the coupon, although the total amount they can obtain is limited to liquidity and a block purchase every week.

Finally, the CEO has a significant carrot that is dangled in front of his nose as per the following in the management information circular:

Pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a one-time grant covering the three-year term of his agreement of 701,875 Options at a stock price of $7.97 per share was awarded to Mr. Eckert on September 15, 2017. The Options are to vest and be exercised on September 15, 2020 at 9:30 EST. The Corporation is to cause a cashless exercise of the Options, whereby the cash proceeds are to be paid to Mr. Eckert as soon as practicable after the settlement of the sale of the underlying Shares. Further, pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a grant of 701,875 Share Appreciation Rights (‘‘SARs’’) was awarded to Mr. Eckert on September 15, 2017. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The SARs are to vest on September 15, 2020 at 9:30 EST. Upon vesting of the SARs, Mr. Eckert will receive a payment in cash representing the excess of the fair market value of Yellow Pages Limited’s shares on the vesting date less the fair market value of Yellow Pages Limited’s Shares on the grant date. Mr. Eckert’s Long-Term Incentive Plan Agreement also included a grant of 156,839 RSUs. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The RSUs are to vest on September 15, 2020 at 9:30 EST.

Can anybody say “incentive to get the stock as high as possible on September 15, 2020?”.

I still believe the end game for the company is to be taken over in a strategic acquisition by some other marketing company. Possession of a 150,000 customer base paying an average of $2,500/year is not a trivial asset, and it would merge quite well into a digital marketing firm looking to increase its customer count and penetration into a wide market across Canada.

Overall, however, COVID-19 has put a huge dent into the thesis. Part of the ultra-bull case was reliant on momentum trading combined with ETFs blindly getting in because the company is going to be a dividend stock. I still believe they will issue a dividend, but a smaller one than the 11 cents per quarter they originally intended on from their February announcement. Fundamentally, businesses still need to reach out to the universe, and they will do so digitally. But if the underlying businesses are hurting (which they are), it will most certainly lead to continued revenue pressures, which does very little to “bend the curve” since everybody else is so focused on trying to flatten it!