Two of the country’s largest yellow pages companies filed for prepackaged Chapter 11 bankruptcy today, hoping to emerge as a single company by July. The two companies, SuperMedia (SPMD) and Dex One (DEXO), announced their merger plans last summer and hope to save as much as $175 million a year as a result of combining their operations.
As anachronistic as a paper directory may seem in these days of Google (GOOG) and Yelp (YELP), the yellow pages are still active businesses. As I previously reported, publishers distributed 422 million directories in 2011. And despite their long decline, yellow pages still generate enough cash to entice some private equity and hedge fund investors. John Paulson’s hedge fund is one of the largest investors in SuperMedia, and AT&T (T) last year sold a stake in its directory business—named simply Yellow Pages—to Cerberus Capital Management in a deal that values the unit at $1.4 billion.
That’s not to say there’s no risk in the companies, particularly for creditors. Both Dex and SuperMedia are quite familiar with bankruptcy. In 2009, Dex One, which was created out of the businesses of Sprint (S) and the old Qwest Communications, went through bankruptcy to halve its $12 billion in debt. And SuperMedia was formed out of the 2009 bankruptcy of the directory business Verizon Communications (VZ) spun off in 2006. That spinoff is still subject to litigation by creditors.
Matthew Stover, SuperMedia’s chief marketing officer, last year told me that “to be successful, anybody who has been in yellow pages needs to be in the local media business now.” That means transforming into a digital ad company that sells marketing services to small and medium-size business owners, helping them manage tasks like search engine optimization, and maintaining a presence on social networks. “If I am a heating and air condition person, when do I have time to do all of this?” Stover said. Directory companies have increased their digital revenue, but not quickly enough to counteract declining print sales. To expand the digital side, they’ll need to make some investments, from developing new technologies to training staff in social media marketing. Even for a leaner company emerging fresh from bankruptcy proceedings, those pressures and challenges aren’t going away.