Yell Group Analysis
Bidding on the Yell Group
1. Introduction
Yell Group consists of two businesses that are operating across countries. Yellow Page is a classified directory business in the UK, while Yellow Book is an independent directory business in the USA. These businesses are currently owned by British Telecom which is under pressure to reduce its heavy debt load and had been wavering for months about the future of these two Yellow Pages divisions. Apax Partner and Hick Muse are two private equity firms that are interested in the acquisition of the Yell Group by using debt for a majority of the purchase price and equity for the remainder. The deal is crucially important to both Apax and Hicks Muse because of its high visibility — simply by virtue of its size and complexity, it will leave its mark on the reputations of both PE firms. But the team faces a challenge when valuing a cross border business involved in the LBO. Not only are those business located in different markets, but they also are characterized by different growth rates and cash flow characteristics. Furthermore, each business unit faces an immediate uncertainty.
2. Overview of LBO
The Equity Sponsor borrows the debt portion of the purchase price, typically through public or private bonds and bank loans issued by the company and contribute the equity portion typically through a private fund. Debt is serviced and repaid with the company’s operating cash flows. The buyer later sells all or a portion of the company and realizes a return on its initial equity investment — Sale of Sponsor equity typically through an initial public offering or a sale to a strategic buyer or another LBO firm. The LBO transaction focuses on cash flows generated by operations and the use of the cash to pay down debt, thereby increasing equity value. Additionally, improvements in operating performance can increase value. Assuming the enterprise value remains unchanged, as debt is repaid, value reverts to the equity holders,
1. Introduction
Yell Group consists of two businesses that are operating across countries. Yellow Page is a classified directory business in the UK, while Yellow Book is an independent directory business in the USA. These businesses are currently owned by British Telecom which is under pressure to reduce its heavy debt load and had been wavering for months about the future of these two Yellow Pages divisions. Apax Partner and Hick Muse are two private equity firms that are interested in the acquisition of the Yell Group by using debt for a majority of the purchase price and equity for the remainder. The deal is crucially important to both Apax and Hicks Muse because of its high visibility — simply by virtue of its size and complexity, it will leave its mark on the reputations of both PE firms. But the team faces a challenge when valuing a cross border business involved in the LBO. Not only are those business located in different markets, but they also are characterized by different growth rates and cash flow characteristics. Furthermore, each business unit faces an immediate uncertainty.
2. Overview of LBO
The Equity Sponsor borrows the debt portion of the purchase price, typically through public or private bonds and bank loans issued by the company and contribute the equity portion typically through a private fund. Debt is serviced and repaid with the company’s operating cash flows. The buyer later sells all or a portion of the company and realizes a return on its initial equity investment — Sale of Sponsor equity typically through an initial public offering or a sale to a strategic buyer or another LBO firm. The LBO transaction focuses on cash flows generated by operations and the use of the cash to pay down debt, thereby increasing equity value. Additionally, improvements in operating performance can increase value. Assuming the enterprise value remains unchanged, as debt is repaid, value reverts to the equity holders,