Valuing a Cross-Border LBO Bidding on the Yell Group

Valuing a Cross-Border LBOBidding on the Yell Group

Introduction

Introduction

Classified Directories, UK, 85% Market ShareIndependent Publisher, US, Marketing-LeadingOverview of LBO

LBO is the acquisition of a company or division of a company using debt for a majority of the purchase price and equity for the remainder.

Overview of LBO

For this cross-border LBO, our team should:Build our own projections for the UK and US businessDecide which method to choose for valuing the two businessConsider that the US and UK business operated using different currency

Overview of LBO

A good LBO candidate will demonstrate many, if not all, of the following characteristics:Business SpecificStrong management teamSteady and predictable cash flow Opportunities for immediate Minimal required capital expendituresLimited working capital requirementsDivestible assets over timeIndustry SpecificHigh market shareMargins will not likely be pressuredIndustry with high barriers to entryLow cyclicality of industryViable exit strategy

Yell Operations

Steady Cash Flow

OFT Imposition

Additional Divisions

Ambitious Growth Plan

New Market Launches

Early Stage of Life CycleYell Operations

Re-projectionBT Yellow PagesHistorical Financial Information and Pro forma for the Business, 19992005 (pounds in thousands)YearActualActualPro formaPro formaPro formaPro formaPro formaPro forma31-Mar-0031-Mar-0131-Mar-0231-Mar-0331-Mar-0431-Mar-0531-Mar-0631-Mar-07Advertisement Volume (000)813853909.298969.31171033.2861101.4831174.1811251.677Weighted Average Advertisement Price ()641645621.78598.77574.82551.83529.76508.57CCF Valuation for Yell Book (dollars in thousands)YearActualActualPro formaPro formaPro formaPro formaPro formaPro forma31-Mar-0031-Mar-0131-Mar-0231-Mar-0331-Mar-0431-Mar-0531-Mar-0631-Mar-07Revenues (New Launches)5670064800567006480000EBTIDA (New Launches) for 1st year2,8353,2402,8353,24000Revenues (Organic)364,900418,400487,350533,800688,390757,229EBITDA (Organic)62,03379,496102,344122,774172,098189,307Transaction Assumption

BT Yellow Pages has its price adjusted for inflation as stated by the OFT.The U.K. discount rate is calculated using the comps Telefonica Publicidad e Informacion and Enriro.The U.S. discount rate is calculated using McLeod USA and World Pages.The terminal value growth rate of BT Yellow Pages is 3.47% which is a forecast of the compound average growth rate of FCF from 2002 to 2007 based on our projection.For the base case, the terminal value growth rate of Yellow Book USA is 4.3% which is the historical growth of the RBOCs.New launches in the U.S. are forecasted to return 5% EBITDA to Sales in the first year.Once launched, the new markets are assumed to reach organic EBITDA margins in the following year.The risk premium of both markets is set as 6.5%Valuation Method

It is accepted that CCF valuation is widely used for LBO. WACC is not applicable here because the calculation of WACC assumes constant D/E ratio. Based on the debt repayment schedule, it is unlikely that the firm will be able to maintain a constant ratio. CCF is ideal for this transaction because the debt repayment schedule is known in advance. Yells two business line, BT Yellow Pages and Yellow Book USA, operates and generates revenue from their respective countries; therefore, we must look each asset as a separate part.Valuation Method

CCF Valuation for Yell PagesGrowth Rate (pounds in thousands)3.47%YearActualActualPro formaPro formaPro formaPro formaPro formaPro formaTerminal31-Mar-0031-Mar-0131-Mar-0231-Mar-0331-Mar-0431-Mar-0531-Mar-0631-Mar-07(Perpetuity)Revenues521133550185565383580399593957607832622031636561Discounts and free ads42,40247,27678,18086,58584,32486,61585,36686,049Direct costs180,479187,395195,972201,742206,649211,278214,996216,716Overhead costs102,53088,87074,93077,13779,01380,78382,20482,862EBIT195,722226,644216,301214,935223,971229,156239,465250,934Tax Rate30%30%30%30%30%30%30%30%EBIAT 137,005 158,651 151,411 150,454 156,780 160,409 167,625 175,654 Change in WC10,57012,7722,1786,0008,4976,3004,3752,023Capex7,3809,76010,2209,7309,2308,3808,0008,000Depreciation5,5305,3706,1308,8508,4007,6308,0008,000FCF (main business)124,585141,489145,143143,574147,453153,359163,250173,6311,878,027Year01234566Discount Factor0.880.780.690.610.540.480.48PV of FCF128,403112,366102,09293,93588,46183,234900,280Sum of FCF1,508,771FCF (other business-4,566-14,438-12,641-8,2381,3621,95610,00020,000153,409PV of other UK businesses-11,183-6,4479431,1985,4199,58873,541Sum of PV of other UK business73,058Valuation Method

Debt schedule for Yell Pages (pounds in thousands)YearActualActualPro formaPro formaPro formaPro formaPro formaPro formaAmountInterest31-Mar-0031-Mar-0131-Mar-0231-Mar-0331-Mar-0431-Mar-0531-Mar-0631-Mar-07Senior Term Loan A47,40047,40043,45037,52529,62519,750600,0007.90%Tax shield (t x interest payment)14,22014,22013,03511,2588,8885,925PV of tax shield53,90613,17912,21410,3768,3056,0773,755Senior Term Loan B14,26314,26314,26314,26314,26314,263175,0008.15%Tax shield (t x interest payment)4,2794,2794,2794,2794,2794,279PV of tax shield19,6903,9563,6583,3823,1282,8922,674Senior Term Loan C14,70014,70014,70014,70014,70014,700175,0008.40%Tax shield (t x interest payment)4,4104,4104,4104,4104,4104,410PV of tax shield20,1424,0683,7533,4623,1942,9462,718High Yield Bond53,75053,75053,75053,75053,75053,750500,00010.75%Tax shield (t x interest payment)16,12516,12516,12516,12516,12516,125PV of tax shield68,71214,56013,14711,87010,7189,6788,739Vendor Loan5,4005,4005,4005,4005,4005,400100,0005.40%Tax shield (t x interest payment)1,6201,6201,6201,6201,6201,620PV of tax shield8,1181,5371,4581,3841,3131,2451,182Revolving Credit Facility7,9007,9007,9007,9007,9007,900100,0007.90%Tax shield (t x interest payment)2,3702,3702,3702,3702,3702,370PV of tax shield10,9902,1962,0361,8871,7481,6201,502Total PV of tax shield181,558Valuation Method

CCF Valuation for Yell BookGrowth Rate (dollars in thousands)4.30%YearActualActualPro formaPro formaPro formaPro formaPro formaPro formaTerminal31-Mar-0031-Mar-0131-Mar-0231-Mar-0331-Mar-0431-Mar-0531-Mar-0631-Mar-07(Perpetuity)Revenues (New Launches)5670064800567006480000EBTIDA (New Launches) for 1st year2,8353,2402,8353,24000Revenues (Organic)364,900418,400487,350533,800688,390757,229EBITDA (Organic)62,03379,496102,344122,774172,098189,307Total EBITDA64,86882,736105,179126,014172,098189,307EBIT58,62874,82697,749117,204164,098181,307Tax Rate35%35%35%35%35%35%EBIAT 38,108 48,637 63,537 76,183 106,663 117,850 Change in NWC37,59643,10850,21254,99870,92578,018Capex10,6008,7008,1708,9908,0008,000Depreciation6,2407,9107,4308,8108,0008,000FCF-3,8484,73912,58521,00535,73839,832522,236Year01234566Discount Factor0.890.790.710.630.560.500.50PV of FCF-3,4283,7618,89713,22820,04919,907260,992Sum of FCF323,406Converted to Pound by spot rate224,588Valuation Method

Total Value of Yell Group (000)1,987,974Acquisition Fee with 5% transaction fee (000)2,087,373

Sensitivity Analysis

Sensitivity in Yell Page to Growth RateAcquisition Fee with 5% transaction fee (000)Growth Rate2,087,3733.47% 1,949,762 2.00% 1,992,235 2.50% 2,038,940 3.00% 2,147,853 4.00% 2,211,879 4.50% 2,283,871 5.00%Sensitivity in Yell Book to Growth RateAcquisition Fee with 5% transaction fee (000)Growth Rate2,087,3734.30% 2,049,580 2.50% 2,058,603 3.00% 2,068,657 3.50% 2,107,134 5.00% 2,123,757 5.50% 2,143,038 6.00%Sensitivity in Yell Pages to regulartory imposition(Keep the terminal growth rate at 3.47%)Acquisition Fee with 5% transaction fee (000)imposition2,087,373-6.00% 2,302,097 -5.00% 2,527,057 -4.00% 2,762,573 -3.00% 3,009,062 -2.00%Sensitivity in Yell Pages to EBITDA margin of new launchesAcquisition Fee with 5% transaction fee (000)Margin2,087,3735.00% 2,085,640 3.00% 2,086,506 4.00% 2,088,239 6.00% 2,089,106 7.00%Sensitivity to risk premium for both marketsAcquisition Fee with 5% transaction fee (000)Premium2,087,3736.50% 2,399,743 5.50% 2,232,233 6.00% 1,960,880 7.00% 1,849,488 7.50%Conclusion

We viewed Yell as a compelling investment opportunity, particularly in light of the companys growth potential, low valuation and leverage capacity. This deal will leave its mark on the reputations of both PE firms.

Thank You!