Something to YELL about

15 June 2009

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Eight years ago, BT's spin-off of directories business YELL marked Europe's largest-ever LBO. Apax Partners and Hicks Muse Tate & Furst (now Lion) paid ТЃ2.14bn for the company, shelling out another $600m the following year to bolt on McLeod. While eyebrows were raised over the lofty sums being thrown about, the investors more than doubled their money with a successful IPO in July 2003, fully exiting in January 2004 - less than two years after the initial acquisition

In fact, the YELL success heralded the onset of a directories phenomenon for private equity. In 2003, BC Partners and CVC teamed up with Investitori Associati in Italy to carve out Seat Pagine Gialle from Telecom Italia for EUR3bn. In 2006, KKR and Goldman Sachs Capital Partners bought France Telecom's directories business PagesJaunes in a deal valuing it at more than EUR6bn - it was the first deal in Europe to contain leverage equivalent to 10x EBITDA.

Unfortunately that's where the good news ended. In order to reap such handsome returns, the deals had been heavily leveraged and YELL, which remained acquisitive post-IPO, is now cowering under £4.2bn of debt. A banker involved in structuring the deal initially, former Merrill Lynch EMEA chair Bob Wigley, was last week named as non-exec chairman of the business. He will be involved in restructuring the debt and was quoted as saying: "It has got the wrong capital structure but is a fundamentally good business." YELL is now considering a rights issue to raise funds after suffering a loss last year of £1bn, and writing down its Spanish arm by even more.

The YELL buyout was funded with £950m of debt, £500m of high yield and £549m in equity. A capital structure containing "just" 25% equity was deemed heady back in 2001 - such a sum would have been standard or even high in 2005-2007.

PagesJaunes is also struggling. Last month, it saw its CEO replaced after 13 years at the helm, and KKR has written down the fund that backed the business by half - with no exit yet in sight. Seat is faring a little better, with Q2 forecasts expected to be hit and the business having just completed a EUR200m capital increase due for refinancing in 2012.

The most unfortunate aspect of these deals is that they may serve as a harbinger for the health of those done more recently. Unfortunately, despite signs that deal-doing is picking up, these stories may hint that more defaults and write-downs lie ahead for yesterday's deals, many of which were, in Wigley's words, fundamentally good but with wrong capital structures.

Yours sincerely, Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.