Yellow Media Shows Global Peers Digital Future: Corporate Canada

Yellow Media Ltd. (Y), Canada’s publisher of business directories, has cracked the Internet code.

The Montreal-based company has rebounded from a debt restructuring to surge almost fourfold in the past year as it captures digital advertising from the plumbers and lawyers that once filled its yellow-pages phone books.

“They’re definitely past the danger point,” Aravinda Galappatthige, an analyst with Canaccord Genuity Group Inc., said in a Jan. 9 phone interview. “There’s a lot more upside.”

Yellow Media, which was taken over by creditors in 2012, offers a possible blueprint for counterparts in Europe, such as U.K.’s Hibu Plc, that are undergoing restructurings of their own. The U.S.’s YP, bought by Cerberus Capital Management LP from AT&T Inc. for $950 million in 2012, is also trying to reinvent itself as a digital-services company as it fends off Internet giants such as Google Inc. (GOOG)

Yellow Media has jumped 233 percent since Dec. 20, 2012, when it completed a recapitalization program in which senior bondholders had their debt converted to shares of a new company. The deal reduced the publisher’s debt by about C$1.5 billion ($1.4 billion). The company’s shares rose 0.9 percent to C$22.85 at 4:25 p.m. in Toronto today.

Digital revenue made up 43 percent of Yellow Media’s sales in the third quarter, compared with 34 percent a year earlier. Profit rose to C$41.8 million, or C$1.51 a share, in the quarter, from C$22.2 million, or 59 cents. Sales fell 11 percent to C$237.4 million.

Corner Stores

Yellow Media still distributes the heavy yellow pages of business listings, although customers must now make a special request if they want the directory of residential numbers traditionally printed on white paper, Fiona Story, a spokeswoman for Yellow Media, said in an e-mail.

The company’s digital turnaround has been successful largely because it already had relationships with mom-and-pop corner stores, said Paul Sweeney, director of North American research with Bloomberg Industries. The company has also done a good job offering a set of services from building websites to video production, he said.

“In order to sell local, you have to have local people on the ground,” Sweeney said by phone from Skillman, New Jersey.

The company has a media sales force of 1,000 and serves about 300,000 local Canadian businesses, according to its website.

France, Italy

Julien Billot, previously an executive at French directory business Solocal Group SA (LOCAL), was named chief executive officer in October and began his tenure on Jan. 1.

“The end goal remains the same: bring Yellow Media to revenue growth and become Canada’s No. 1 digital-media and marketing-solutions company,” Billot said in a Jan. 10 conference call. The company declined to comment further.

The company repaid about C$153 million in debt in 2013, or about 19 percent of the C$800 million bond principal, Andrew Calder, an analyst at RBC Capital Markets, said in a November research note.

Directory publishers are having a harder time in Europe, where some are struggling with high debt and weaker economies that have restrained advertising revenue, Canaccord’s Galappatthige said.

Hibu of the U.K. agreed to terms with lenders in July on a debt restructuring. Italy’s Seat Pagine Gialle SpA (PG) submitted a debt-for-equity swap in December, while Solocal, formerly known as PagesJaunes, had its debt rating downgraded by Moody’s Investors Service in December on concern about its ability to refinance and improve operations.

Spokesmen for Hibu, Seat Pagine and Solocal declined to comment.

‘Poster Child’

Shares of Solocal have dropped 55 percent over the past 12 months. Sales of the Sevres-based company fell 6.3 percent to 749.4 million euros ($1.02 billion) in the first nine months of 2013 from a year earlier, though digital revenue climbed to 63 percent of sales from 58 percent the year before, the company reported in November.

A possible debt restructuring is hanging over Solocal, Canaccord’s Galappatthige said.

“PagesJaunes was the poster child for this kind of transition,” Galappatthige said. With his experience at the French company, Billot “was the person we hoped would take the job when the original search was happening,” the analyst said.

Cerberus’ YP

In the U.S., Cerberus-owned YP changed its brand from Yellow Pages and is now generating more than $1 billion in digital-advertising revenue a year, according to the company’s website. It ranked 38th among the top 50 U.S. desktop websites in December, according to ComScore Inc., down from 37th last year. Yahoo! Inc. sites were first and Google second, according to ComScore.

Deann Mayeda, a spokeswoman for YP, declined to provide the company’s 2013 sales or financial figures. Peter Duda, a spokesman for Cerberus, declined to comment on the private-equity firm’s plans for YP.

While directory businesses are in good position to work with local advertisers, larger competitors such as Google are more effective dealing with national campaigns, Sweeney said. Attempts by technology companies to build local-level networks, such as AOL Inc. (AOL)’s Patch, have failed to turn a profit, he said.

“The majority of our advertisers are small businesses that see the Internet and Google AdWords as critical marketing vehicles for their success,” Leslie Church, a Google spokeswoman, said in an e-mail.

GoldenTree Gains

AOL said Jan. 15 it sold a controlling stake in its Patch local news network to Hale Global for an undisclosed amount. The company spent more than $300 million developing more than 900 local websites. Peter Land, a spokesman for AOL, declined to comment on the challenges the company faced in the local-advertising market.

One of Yellow Media’s biggest investors has collected profits from the stock’s gains. GoldenTree Asset Management LP sold about 43 percent of its shares in the publisher from October 2013 to Jan. 7, 2014, according to data compiled by Bloomberg. GoldenTree still holds 8.5 percent of the company, the data show, second only to the 20 percent interest held by Richmond Hill, Ontario-based Canso Investment Counsel Ltd.

GoldenTree “remains constructive” on the stock and is satisfied with the current size of its holdings, said Pat Dyson, a fund manager with the New York-based hedge fund. “There can be additional upside as you get closer to the threshold where digital becomes greater than 50 percent of total revenue.”

Smaller Competition

Even so, Yellow Media faces risks including growing competitive pressure online as more businesses migrate to the Internet, Canaccord’s Galappatthige said.

Smaller reviewing sites such as Yelp Inc. (YELP) are also increasing competition. Yelp was 29th on the ComScore ranks in December, compared with 30th last year.

Yellow Media’s stock gains have made Brian Huen, a fund manager with Red Sky Capital Management Ltd. in Toronto, unlikely to buy the shares unless the price dips.

“Right now it looks a little bit expensive as the easy money has been made,” said Huen, whose firm manages about C$225 million. “We are watching it. You can’t ignore it.”

To contact the reporters on this story: Eric Lam in Toronto at elam87@bloomberg.net; Gerrit De Vynck in Toronto at gdevynck@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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