yellow pages sale stokes seven

Yellow Pages sale stokes Seven
Michael Sainsbury
January 15, 2007

AUSTRALIA'S major media groups, headed by Kerry Stokes's Seven Media, are lining up for the impending auction of Telecom New Zealand's $2 billion Yellow Pages business - many of them hand-in-hand with their global private equity partners.
The Australian has learned that Seven and its private equity partner, US-based Kohlberg Kravis Roberts, are keen to add the directories group to their portfolio. Last year, Seven Media's Yahoo7 venture was successful in inking an alliance with Telecom New Zealand's internet division, Xtra.
The partners have $4 billion to spend on media acquisitions after Mr Stokes sold 50 per cent of his media assets in to a new joint venture with KKR last year. Yahoo7 tipped out incumbent content and applications partner, Microsoft's MSN group, which ran its platform through Australia's ninemsn joint venture with James Packer's Publishing and Broadcasting Ltd.

Fairfax Media is also understood to be interested in Telecom New Zealand's Yellow Pages business. Fairfax has invested heavily in New Zealand in recent years, buying newspaper group INL from News Limited in 2003 and last year spending $NZ700 million (about $617 million) on online auction business Trademe. The fast-growing New Zealand internet group has moved into online classifieds in a number of areas.

Still, Fairfax has its hands full with its purchase of Rural Press now under way, leaving it short of cash.

Like Telecom New Zealand (TNZ), the New Zealand Yellow Pages group has a near monopoly in the market, with earnings before interest, tax, depreciation and amortisation (EBITDA) margins of close to 60 per cent. This ranks it among the best performing global directories businesses.

Private Equity groups have a solid track record of purchasing directories businesses. They have mopped up most of the European directories groups over the past few years and multiples for such business have been steadily climbing. Last year, KKR paid E3.3 billion ($5.5 billion) for 54 per cent of France Telecom's Yellow Pages, equivalent to 15.3 times EBITDA.

In a recent memorandum to potential buyers, TNZ said it expected the directories group to have revenues of $NZ280 million and post an EBITDA of $NZ160 million this year.

"If someone ends up paying a high-end multiple, this has very significant implications to Telecom New Zealand," Macquarie Bank analyst Andrew Lay said in a recent note.

"We estimate that if the final price is $NZ2.2 billion, TNZ can spend $NZ1.6 billion buying back its own stock."

Telstra is also interested in the New Zealand business in which it has had a stake since the internet boom in the late 1990s.

Telstra could easily lock it into its Australian directories business, Sensis, but observers believe Telstra is unlikely to be successful for two reasons.

Firstly, TNZ would be reticent to give its main local telecommunications competitor a leg-up in expanding its business.

Telstra owns TelstraClear, TNZ's biggest fixed-line competitor. The companies also compete in Australia, where TNZ owns ailing No3 fixed-line player AAPT.

Secondly, a $2 billion outlay by Telstra may spook investors keen on Telstra's high-dividend payments.

The big Australian telco is already borrowing to pay its dividends, a policy its chief executive Sol Trujillo has said he is not particularly comfortable with.

Macquarie Bank has also entered the market, buying pan-European group Yellow Brick Road two years ago, and may also consider a bid, using any number of potential vehicles. A number of other global private equity firms are also understood to be considering bidding for the business.

TNZ announced it would sell its Yellow Pages business last year following a scoping study conducted with assistance from investment bank Citigroup.

Embarrassingly for the bank, the sale mandate was handed to Goldman Sachs JBWere.

TNZ has asked for expressions of interest by February 2 and to complete the sale by June 30.