Yellow-pages deals red hot as telecom industry regroups

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The biggest deal of 2001 was America Online's $147 billion takeover of Time Warner. Last year's top media deal? Qwest Communications' sale of its yellow pages for $7 billion to two private-equity firms.

Qwest wasn't alone in dealing yellow pages. R.H. Donnelley Corp. is buying Sprint Corp.'s phone books for $2.2 billion. British publisher Yell Group paid $600 million to buy the U.S. directories of bankrupt telecom McLeodUSA. Kohlberg Kravis Roberts & Co. is getting into the act with a buyout of Bell Canada's directories. A Deutsche Bank analyst who follows the category said it's conceivable remaining Baby Bells will sell some of their yellow pages, putting more books in play.

What's the big deal?

Sellers-phone companies struggling with debt, overcapacity and slumping prices for telecom services-are unloading yellow pages as part of a strategy to raise cash and focus on core businesses.

Buyers-including a pile of private-equity outfits-see yellow pages as a steady, high-margin business that generates the cash to support leveraged deals.

Yellow-pages deals are a byproduct of the telecom and Internet implosion-phone companies want cash, and media investors will pay for simple businesses rooted in the old economy.

local ads

Yellow pages are dominated by local advertising, and all those ads from small businesses add up to big business: 3.6 million advertisers in 2002 spent $13.7 billion on ads in more than 6,000 U.S. yellow pages books, according to the Yellow Pages Integrated Media Association, a trade group. That makes yellow pages a bigger advertising medium than magazines, cable networks or local TV. Yellow-pages revenue in 2003 will grow 3.8% vs. ad-industry growth of 5%, estimates Robert J. Coen, senior VP-director of forecasting at Interpublic Group of Cos.' Universal McCann.

National yellow-pages advertising is growing, but local ads still account for 85% of the total. Overall yellow-pages revenue has grown every year since 1980.

It's hardly a rocket; yellow-pages revenue in 2002 was up 53% from 1990 vs. an 83% increase in total U.S. advertising. Nor are yellow pages recession-proof: Revenue increased less than 1% in 2002, though on the other hand it grew in 2001 while other media were falling.

"You look at a very simple product that's gotten the job done for 120 years," said David Dunn, VP in the media group at Deutsche Bank, which advised Sprint on its sale and helped provide financing for the Qwest deal. "It's not too hard to figure out how it works and how it actually makes money. And it makes a lot of money."

Donnelley, the only publicly traded U.S. directories company, reported net income of $59.4 million in the first nine months of 2002 (up less than 1% from 2001), generated on slightly reduced revenue of $59.1 million coupled with $108.8 million in proceeds from partnerships and joint ventures with phone companies.

hot stocks

AOL Time Warner's stock has fallen about 72% since its big-bang collision of old and new media in January 2001. Since that time, Viacom is down about 22%, Dow Jones & Co. about 24% and Yahoo! about 32%. Donnelley? Its stock is up 12% since the ad market turned south in early 2001 and up 84% since it was spun off from Dun & Bradstreet Corp. four years ago.

Information seekers access yellow pages 1.5 billion times annually over the Web, CD-ROM and cellphones, according to John A. Greco Jr., president-CEO of the yellow-pages trade group. But the Web hardly has killed the printed page. Mr. Greco said people refer to yellow-pages books 15 billion times a year, a figure that's been holding steady. Mr. Greco's group plans to start tracking online yellow-pages spending in 2003, but the big money remains in print. Mr. Dunn figures online yellow pages generate no more than $600 million in revenue, just 4% of print books' revenue.

crossing borders

The big guns in yellow pages are local phone companies, and their properties are driving multibillion-dollar deals. Ailing Qwest, successor to Baby Bell U S West, sold its books to Carlyle Group and a second private-equity firm. Sprint is selling its books to Donnelley, backed by Goldman Sachs Capital Partners. Mr. Dunn said it's conceivable remaining Baby Bells-Verizon, BellSouth Corp., SBC Communications-will at some point sell off parts of their valuable yellow-pages holdings.

Other deals are crossing borders. Texas investor Hicks, Muse, Tate & Furst in 2001 helped finance a spinoff of the U.K.'s Yell Group from BT Group, and Yell in 2002 bought the local-directory business of Iowa-based telecom McLeodUSA as part of McLeod's bankruptcy reorganization. Kohlberg Kravis Roberts & Co., meanwhile, in November participated in a buyout of Bell Canada's directories.

Yellow pages, once held captive by the Bell System, are ripe for consolidation among companies whose business is advertising, not phones. That offers an opportunity for focused new owners to bring innovation to an old medium. "I think potentially the bar will be raised a little," Mr. Greco said. "

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