Yell case
Case Study Preparation Questions
Valuing a Cross-Border LBO: Bidding on the Yell Group
Shiyu Liu
1. Include a paragraph to summarize the case.
A group of private equity investors – Apax Partner and Hick Muse are two private equity firms that are interested in buying the Yell Group. Yell Group comprises of two businesses that operated in both the United States and the United Kingdom. Yellow Pages is a classified directory business in the UK while Yellow Book is an independent directory business in the USA. In order to reduce the leverage, British Telecom which own these two businesses currently is thinking deeply over a sale. In the same while, Yellow Apax Partner and Hick Muse must value the leveraged buyout of a Yellow Pages business. In the process, they must solve with problems of how to conduct valuations of cross-border business involved in a LBO. The case analyzes the economics and incentives of carried interest and compares with Capital Cash Flow. The value of debt equals the tax shield generated by each strand of debt. While the equity can be valued by discounting the Capital Cash Flows with the unlevered cost of equity capital. The management’s calculations are evaluated and complemented to arrive at a proposed bid price for the Yell Group. 2. The Apax/Hicks Muse (PE firms) team used the “sum of part” approach to value Yell while working on the deal, by estimating the BT Yellow pages and Yellow Book USA separately and then summing up to calculate the total value. Assume that you were assigned to estimate the intrinsic value of Yellow Book USA:
- select the appropriate comparable and estimate Yell’s cost of capital, - assume debt beta is 0.25 and market risk premium is 7.2%
- estimate the cost of capital that should be used to value US business
- use the worksheet “CCF-US business” in the Excel file, estimate terminal value and intrinsic value of the US business in pounds First, the D/TA ratio can be calculated by averaging
Valuing a Cross-Border LBO: Bidding on the Yell Group
Shiyu Liu
1. Include a paragraph to summarize the case.
A group of private equity investors – Apax Partner and Hick Muse are two private equity firms that are interested in buying the Yell Group. Yell Group comprises of two businesses that operated in both the United States and the United Kingdom. Yellow Pages is a classified directory business in the UK while Yellow Book is an independent directory business in the USA. In order to reduce the leverage, British Telecom which own these two businesses currently is thinking deeply over a sale. In the same while, Yellow Apax Partner and Hick Muse must value the leveraged buyout of a Yellow Pages business. In the process, they must solve with problems of how to conduct valuations of cross-border business involved in a LBO. The case analyzes the economics and incentives of carried interest and compares with Capital Cash Flow. The value of debt equals the tax shield generated by each strand of debt. While the equity can be valued by discounting the Capital Cash Flows with the unlevered cost of equity capital. The management’s calculations are evaluated and complemented to arrive at a proposed bid price for the Yell Group. 2. The Apax/Hicks Muse (PE firms) team used the “sum of part” approach to value Yell while working on the deal, by estimating the BT Yellow pages and Yellow Book USA separately and then summing up to calculate the total value. Assume that you were assigned to estimate the intrinsic value of Yellow Book USA:
- select the appropriate comparable and estimate Yell’s cost of capital, - assume debt beta is 0.25 and market risk premium is 7.2%
- estimate the cost of capital that should be used to value US business
- use the worksheet “CCF-US business” in the Excel file, estimate terminal value and intrinsic value of the US business in pounds First, the D/TA ratio can be calculated by averaging