As you are all know by now, AT&T recently reached a deal to sell a majority stake in its Yellow Pages operation to Cerberus Capital Management. The deal for 53% of the unit was reportedly valued at about $1.42 billion ($750 million in cash and a $200 million note). Once completed the transaction will result in the formation of a new entity, uncreatively titled “YP Holdings LLC”, with Cerberus having management control.
Within minutes of the announcement, I start seeing all kinds of negativity directed at the business with comments like “unloaded”, “distressed”, “apocalyptic”, “another large telecom is hanging up on printed directories”, “Phone books are obsolete”, and on and on. I of course, disagree totally with these comments of doom and gloom. And let me tell you why:
Print yellow pages are still a cash-generating sales machine. The AT&T Yellow Pages operation brought in $3.3 billion in revenue last year. Let’s compare that with the results from one from the darlings of the internet which was supposed to be a Yellow pages killer, Yelp, which only eked out $83.3 million. Surprising Yelp has a market capitalization of $1.39 billion, which would put is just below YP Holdings. Going further, the other Internet star in the space, Angie’s List, is also valued well below the AT&T operation, with a market cap of about $870 million.
Print Yellow Pages are declining, but they won’t die. At least not for a very long time. Even the Associated Press noted the situation. Print Yellow Pages are not like their fellow traditional media friends — newspapers, which have seen a loss of $27 in print for every digital $1 gain (source).
As a recent ADP association release noted, Yellow Page advertising continues to deliver the most calls at the best rate out there. They reported that Bloom Ads, Inc. a full service advertising agency located in Woodland Hills, CA conducted a two year test for one of their large regional insurance providers. The test utilized unique call tracking numbers for ads appearing on broadcast, out of home and in print yellow pages.
The results were pretty solid:
- Print yellow page ads drove on average 55% of all calls at a cost per call of under $30.00
- Television & Radio generated approximately 40.5% of all calls at a CPC of approximately $160.00
- Outdoor represented an average of 4.5% of the overall calls at a CPC of over $300.00
AT&T completed a shrewd business move. I am admittedly not a financial guru. But just take a closer look at the structure of the deal – AT&T didn’t sell the entire operation, so with 47% ownership, the cash generated from Yellow Pages will continue to roll in, it is now has a minority business stake so they no longer need to publicly report numbers, and they got nearly $1 billion in cash to use in their other operations.
The folks at Cerberus aren’t dummies. As The Boston Globe pointed out in 2010, Cerebus has a history of quietly buying struggling companies and then selling them at a profit: “They range from the Alamo and National rental car companies, both of which it sold to Enterprise Rent-A-Car, to plasma medicine company Talecris Biotherapeutics, which it took public in an initial public offering.” Cerberus isn’t perfect as they also invested in Chrysler and GMAC which needed government bailouts. However, do you really think they would invest that kind of cash in a dead-end business?? Not.
The best summation I can offer you comes from an unlikely source – David Lazarus from the LA Times: “Sometimes a deal looks so screwy, you’ve got to wonder what they’re thinking — such as a private-equity group buying a majority stake in AT&T’s Yellow Pages division. This is the age of Google and Yelp and Groupon….” Check out the video: http://www.youtube.com/watch?v=u8Mf04-vZAI. And don’t listen to the doom and gloomers…