For Better or Worse, AT&T Deal Sets Bar for Yellow Pages

AT&T has sold a 53 percent stake in its Yellow Pages business to the private equity firm Cerberus Capital for $950 million. This works out to a valuation of $1.8 billion. The deal involves both the Advertising Solutions and AT&T Interactive operations.

Significantly, AT&T has elected to hang onto 47 percent of the business. AT&T may be reasoning that a private equity firm would be more willing and able to make the substantial changes to the business needed to unlock value. If it works, AT&T will see the value of its sizable remaining stake grow, perhaps substantially.

AT&T Advertising Solutions produced EBITDA of $1.03 billion in 2011 (2011 revenues were $3.3 billion), so the deal works out to about a 1.75X EBITDA multiple. In historic terms, that is awfully, awfully low, but it reflects how investors view the directory business today. The intensely negative view of the legacy Yellow Pages business (somewhat overdone in our view, given the residual value in the print product) will lead some companies to consider shutting down their print operations just so they can be valued as an online rather than a legacy business. This is why so many companies are telling investors that within a few years, print will not account for more than a quarter of revenues.

We think this deal is a steal for Cerberus. As we wrote when reports of this deal first surfaced, had AT&T sold its directory business at peak multiples back in 2007, the business could easily have fetched more than $10 billion. It’s been a tough road for directories since then, but the AT&T business is better than this fire sale price suggests. The company has a huge sales force, strong brands and deep executive talent, and it still produces $1 billion in EBITDA. If Cerberus is wise, it will retain AT&T’s top talent, people like Mike Fordyce, David Krantz and many others.

The AT&T deal is likely to have repercussions around the global industry, as investors in other directory companies will be dismayed that the largest company in the industry has just sold at such a low multiple. This could compel debtholders at other publishers (Dex One, SuperMedia) to find a deal while they think they still can. Another perhaps more likely scenario is that investors will sit tight and see how this deal plays out. As long as the businesses are generating cash and servicing their debt, why do a fire sale? Longer term, we think consolidation is inevitable among the major U.S. directory companies.

The only reliable prediction is that Cerberus will not stand pat but will take some dramatic action with AT&T, either to strip out costs or reposition the business (probably some combination of both). Will it combine the Ad Solutions and Interactive businesses? What about a roll-up scenario? Will it rationalize its print footprint, culling under-performing markets? These and other options are likely on the table.