Yellow Pages sheds Auto Trader assets

The Globe and Mail

February 3, 2006-- Workers pass by a Yellow Pages reference room in their Montreal offices on February 3, 2006. For Business. Globe and Mail/Christinne Muschi (Christinne Muschi/Christinne Muschi/THE GLOBE AND)

Goodbye, pickup trucks. Hello, property sales.

Yellow Media Inc. is parting ways with its cherished Auto Trader assets and shifting its attention to building an online business out of its relatively small real-estate division.

The Montreal-based publisher of the Yellow Pages print and online directories said Friday it is selling the automotive segment of Trader Corp., which includes Autotrader.ca and its related publications, to London-based private equity firm Apax Partners for $745-million. Yellow Media purchased those assets five years ago for about $1.2-billion, but the company needs cash to pay down a heavy debt load.

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The remaining assets are dominated by the slow-growth, legacy print products, but chief executive officer Marc Tellier hopes to transform his real estate segment into an online success story, as he did with AutoTrader.ca.

"Rightfully so, the jury is out as to whether we will be successful in making that turn," he said in an interview. "We think we will be, because we've already done it once in automotive."

When Yellow Media picked up the Trader assets in 2006, only 15 per cent of Trader's revenue was generated online, Mr. Tellier said, compared with 70 per cent today.

The sale gives Yellow Media some breathing room to embark on its real estate expansion.

The company has been under the watchful eye of rating agencies and was at risk of losing its investment grade rating if it did not lower its debt load. Just before the sale, total debt was 3.8 times earnings before interest, taxes, depreciation and amortization.

But Mr. Tellier rejected the suggestion that he was pressured to unload Trader Corp., saying: "Let's be very, very clear about one thing: No one had a gun to my head to sell this asset."

While he acknowledged that Standard and Poor's suggested lowering debt by $450-million in 2011, he said he discussed his plans to tackle the debt load with the rating agency before the commentary was made public.

An investment grade rating is crucial to Yellow Media because it gives the company some financial freedom. Had it lost the rating, Yellow Media would have had to cap its dividend at 50 per cent of distributable cash. That would be problematic because retail investors love its juicy 12.3-per-cent yield (calculated just before the deal was announced).

However, that is no longer an immediate concern. S&P and DBRS have already confirmed the company's ratings at BBB- and BBB(high) post-transaction.

Although Yellow Pages lost money on the sale, Desjardins Securities analyst Maher Yaghi noted that it at least sold the assets at a premium to their current value. Of the total sale price, he calculated that Trader Corp.'s own assets were worth $600-million, while its 30-per-cent stake in Dealer.com, a fledgling U.S. website, accounted for the remaining $145-million.

Apax was not the first company to bid on the Trader assets, but ultimately secured them through an auction. The purchase expands Apax's presence in the automotive space, including ownership of Auto Trader UK.

The Trader Corp. assets left behind include Les Pac, a website that rivals Kijiji and Craigslist in Quebec; as well as the small real estate division. Combined, these businesses generated $12-million of Trader Corp.'s $94-million in adjusted EBITDA in 2010.

The divested assets were bought in four transactions from 2006 to 2010. The two major deals were for Trader Media Corp. and Trader Canada, purchased in 2006 for $436-million and $761-million, respectively.

Now that they're gone, Yellow Media must prove that it can still be successful. Concerns have already surfaced.

After praising the company for reducing its debt load, TD Securities analyst Scott Cuthbertson noted that "the fundamental longer term issues remain: Can this company migrate its business from a print monopoly to a competitive marketing alternative for small business in an increasingly digital space?"

Follow on Twitter: @timkiladze

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