Cerberus' deal to buy 53% of the business for $750 million cash gives it an implied equity value of $1.42 billion -- for a unit that last year generated $3.3 billion in revenue. Cerberus also will give AT&T a $200 million note.
Compare that with three local internet ventures that went public over the past year:
- Groupon, the local deals site with a market cap of $8.92 billion and $1.6 billion in 2011 revenue
- Yelp, the free local-reviews site with a market cap of $1.39 billion and $83.3 million in 2011 revenue
- Angie's List, the subscription-based local-reviews site with a market cap of $887 million and $90 million in 2011 revenue.
The valuation of AT&T's directories business reflects challenges the field faces in transitioning from print books to online and mobile solutions. Its $3.3 billion in 2011 revenue reflected a 16.3% year-over-year decline. Revenue was as high as $5.4 billion in 2008. High valuations on the digital plays, meanwhile, reflect investors' expectations of continued fast growth for the newcomers.
That AT&T, a powerhouse in mobile phones and high-speed internet services, couldn't find a way to make its yellow-pages unit into one of the dominant, rapid-growth, go-to local-digital plays shows the tough realities of this market.
Cerberus will own 53% and AT&T will own 47% of the yellow-pages business, which will be called YP Holdings. YP Holdings will include about 1,200 The Real Yellow Pages directories, going to 150 million homes and businesses in 22 states; YP.com; YP Local Ad Network, covering more than 300 mobile and online publisher websites; and the YPmobile app.
The deal, which is expected to close midyear, includes assets of AT&T Advertising Solutions, a sales- and customer-support operation, and AT&T Interactive, a product-development unit. It does not include the recently formed AT&T AdWorks, which offers ad programs across the web, mobile platforms and TV.
What's in this for Cerberus? Yellow pages can still make money. AT&T Advertising Solutions did lose money in 2011 because AT&T wrote down the value of the unit by $2.9 billion, taking charges for goodwill impairment and impairment of a trade name. But in 2010 the unit reported operating-income margins of 21.7%.
The No. 2 through No. 5 yellow-pages firms have all gone through bankruptcy or other financial restructurings in recent years.
No. 2 SuperMedia went through Chapter 11 in 2009. It had been known as Idearc, formed when Verizon Communications spun off its directories business in 2006.
No. 3 R.H. Donnelley Corp. emerged from Chapter 11 in early 2010, changing its name to Dex One Corp.
U.K.-based Yell Group, the No. 4 player based on its U.S. revenue, went through a debt financing in 2009.
No. 5 Local Insight Regatta Holdings emerged from bankruptcy in November 2011, taking the name The Berry Co.
There may be more yellow-pages deals, partly because the recent restructurings haven't resolved the fundamental issue of the sector's decline.
Last month Moody's Investors Service lowered SuperMedia's credit rating to a bleak, deep-junk Caa3, "based on our view that a debt restructuring is likely."
"SuperMedia is attempting to reinvent its business by reducing its reliance on print advertising through the development of online and mobile directory service applications, but we have doubts that the company will be able to transition its business away from a reliance on print directories quickly enough to stabilize its revenues and earnings and prevent a debt restructuring," Moody's said. It predicted that revenue will continue to decline at a double-digit rate.
Ad spending elsewhere in print is recovering better than in yellow-pages directories, and "Moody's thus believes the structural challenges the directory industry faces will remain severe," the agency wrote.