Byline: William Hutchings
The owners of Yell, the UK directories business, have responded to concerns of institutional investors by reducing the share price of its initial public offering (IPO).It is the second time in recent weeks that the private equity industry has responded to public market influence. Deutsche Asset Management surprised the industry last month by remaining a minority shareholder in Fitness First, the UK health group, when it becomes an unlisted stock after it is bought out by Cinven.
The reduction in price reflects the fall in the market since last year, when the first attempt to float Yell was abandoned.
The Yell offering seeks at least [pounds sterling]850m ([euro]1.2bn) from the market - [pounds sterling]433m for the company and at least [pounds sterling]417m for the purchase of shares from existing shareholders, whose two principals are Apax and Hicks, Muse, Tate & Furst, the private equity firms. They should approximately double the value of their investment in Yell, which they bought from BT, the UK telecoms group, in 2001 and subsequently enlarged with the acquisition of McLeod and National Directory Company in the US.
Apax and Hicks, Muse, Tate & Furst stand to receive between [pounds sterling]437m and [pounds sterling]565m in cash from floating the company. The figures include [pounds sterling]14m to each in fees relating to the flotation. They exclude other fees charged by the firms and [pounds sterling]8m two of the company's directors expect to receive. The firms will receive the higher figure if the float goes well and Merrill Lynch, the underwriter, sells the [pounds sterling]128m it has set aside to stabilise the share price.
The two firms will retain 50% of Yell's shares, falling to 44% if the float is successful and the extra [pounds sterling]128m of shares is sold. They took 95% of the equity on the original purchase, giving Yell an enterprise value of [pounds sterling]2.1bn, including [pounds sterling]1.45bn of third-party debt. Yell used debt to acquire McLeod for [pounds sterling]417m in April 2002 and National Directory Company for [pounds sterling]43m in December.
Ivor Pether, a UK equities portfolio constructor at Royal London Asset Management, says: 'The price is considerably cheaper compared with last time. The offering implies an enterprise value of less than eight times earnings before interest, tax, depreciation and amortisation (Ebitda). It was more like 9.5 times when they tried to float it a year ago.' Ebitda has risen in the last 12 months and the share price offered is slightly lower than last year's.
Apax and Hicks, Muse were forced to abandon Yell's IPO 12 months ago. They and their banking advisers put this down to volatility in the stock market but, at the time, fund managers expressed other concerns.
Gareth Thomas, a fund manager at Allianz Dresdner Asset Management, said at the time: 'I thought Hicks, Muse was having big problems and needed to raise cash.' John Hatherley, head of global analysis at Prudential's M&G, said: 'It was very opportunistic. It was being sold on the basis of growth in the US. Competition emerged as a real issue.'
Michael Maughan, a pan-European media equity analyst at Gartmore, said: 'US investors were saying rival directories businesses could become more threatening. Yell was looking to get it away at about a 10% discount to fair value but that would not have left any valuation upside. Because of the risks of the US business model, they should have offered it at a 15% to 20% discount.'
A year later, fund managers such as Pether say the risks have diminished. Pether says: 'We are a year on now. We have had a year of experience of Yell owning McLeod.'
Yell's prospectus says McLeod increased its turnover by 30% last year through the launch of new directories and growth in advertising in existing ones.
Merrill Lynch and Goldman Sachs are acting for Yell as joint global co-ordinators and joint bookrunners. The two banks have persuaded Yell to take the minimum time roadshowing the IPO in the hope of avoiding the market volatility that upset last year's attempt.
Sources close to the deal say Apax and Hicks, Muse have no other plans for Yell's disposal if the flotation flops again. The sources say they have not considered selling Yell to the purchasers of Seat Pagine Gialle, the Italian yellow pages that Yell sought to acquire last month.whutchings@efinancialnews.com
