Yellow Fever, Courtesy of Verizon


In an age where consumers can access information via computer, cell phone, or PDA, yellow pages may seem like a stodgy relic of the old media. However, published directories are one of the hottest financial plays around. And there's no shortage of investors hungry for the cash generated by those fat yellow books that each year land with a thud on millions of doorsteps across the country.

So as Verizon Communications (VZ) shops its $3.6 billion Verizon Information Services unit, analysts and bankers expect the business to draw a lot of attention. Interest may be so high that a bidding war ensues for the whole unit or pieces that could be sliced off and sold to different parties. The most likely buyers include private equity firms.

"VALUABLE ASSET". The financial community began buzzing about the various combinations on Dec. 4, when Verizon said it had hired Bear Stearns (BSC) and J.P. Morgan Chase to help it sell or spin off the business. "It's a very salable asset," says David Goddard, an analyst who tracks yellow pages companies for Simba Information, a research firm based in Stamford, Conn. "There are some companies that are very interested in investing in yellow pages operations."

Even so, Verizon is ready to move on from directories as it transforms from a low-growth phone company into a faster-growing provider of broadband and wireless services to consumers and corporations (see BW, 11/7/05, "Rewired and Ready for Combat"). The unit could fetch $13 billion to more than $17 billion, and the sale could help Verizon slice its $34.4 billion in long-term debt, acquire new companies, or accelerate investment in new technologies.

Less debt would give Verizon more leeway should it opt to buy Vodafone Group's (VOD) minority stake in the companies' wireless joint venture, says a person familiar with the transaction. "It's obvious they have bigger plans behind it," says Scott Cleland, an analyst at The Precursor Group. "This is a valuable asset they don't view as core to their business. It creates a war chest to acquire other businesses or invest in their own business."

BROADBAND THINKING. The most pressing investment Verizon faces now is a wildly expensive and risky bet on broadband. It will cost Verizon $15 billion to $20 billion to string fiber-optic cables directly to consumers' homes so it can offer them super-fast Internet service and cable TV (see BW Online, 11/23/05, "A Digital Dodge City"). The communications giant could use the money to speed up the network creation or buy new spectrum for its wireless business.

In the coming weeks, Verizon is expected to close its $8.4 billion acquisition of MCI. But Cleland says it could also use the largesse to finance another blockbuster deal, such as acquiring phone giant Bell South Corp. (BLS) or wireless player Alltel. "$17 billion would be a nice down payment," he says.

The yellow pages is an old business undergoing swift change. Last year, the U.S. yellow pages market grew 4%, to $15.5 billion, according to Simba Information. However, new independent directory makers such as R.H. Donnelly are taking market share from the incumbent phone companies that publish the yellow pages.

PROFITABLE INK. What's more, new Internet services threaten to render the fusty doorstops obsolete. Last year, sales at Verizon's directory business, which publishes 1,750 directories with a circulation of 121 million, shrunk 6% to $3.6 billion. But it was still incredibly profitable, with nearly $1 billion in income.

Those large cash flows have driven a string of large deals for yellow pages publishers, both in the U.S. and overseas. In September, 2004, media conglomerate Hearst Corp. bought Buffalo-based White Directory Publishers for $300 to $400 million. This May, British phone directory publisher Yell Group announced a $1.5 billion deal to buy California-based TransWestern Holdings from private equity groups Thomas H. Lee Partners, CIVC Partners, and TransWestern's management. And in October, R.H. Donnelley, of Cary, N.C., announced it was buying rival directory publisher Dex Media for $9.5 billion.

Verizon's directory business could make an attractive target for other yellow pages publishers such as R.H. Donnelly or Hearst, or private equity firms that have already placed bets in this market, say analysts and bankers. Over the past year, Verizon has fielded inquiries from Donnelly and several big buyout firms, says the person close to the deal.

BOOK SALES. Private equity firms gravitate toward the directory business because stable cash flows allow them to finance the transactions with large amounts of debt. This May, Bain Capital sold a Canadian yellow pages company for $2.5 billion just months after buying it in November, 2004, for $1.5 billion. Directories "are well suited to the profile of a private equity business," says Michael J. Price, senior managing director of Evercore Partners, a New York-based investment bank.

Most analysts say Verizon's business is likely to be sold off in chunks because the price tag would be too large for any one company to swallow. However, M. Benjamin Howe, managing partner of America's Growth Capital, a Boston-based investment bank, says a consortium of firms may group together to take over the entire business. In March, a group of seven private equity firms acquired SunGard Data Systems for $11.3 billion.

"The private equity [firms] have more capital today than when they did the SunGard deal," says Howe. "There's no reason they couldn't do a $17 billion deal."

An Internet player also could scoop up part or all of Verizon's directory business and use it as a beachhead for local search and e-commerce operations. Possible suitors include such players as Barry Diller's IAC/InterActiveCorp, or Yellowpages.com, a joint venture of the online directories of SBC Communications (SBC) and Bell South.

"RELIABLE CASH MACHINES." However, Internet companies may be reluctant to make a deal because it would lower their growth rates and take some oomph out of recent stock-price rallies. "They would need to get revenue synergies or enough of a discount to justify the purchase," says Howe.

At very least, some analysts say that Verizon's online directory, Superpages.com, would make an ideal target for an Internet directory service that competes against Yahoo! (YHOO) or Google (GOOG). Superpages.com is one of the largest Internet-based directories with an estimated $200 million in sales.

"There aren't a lot of reliable cash machines available of this size," says Cleland. Wherever these assets end up, it's clear that Verizon has a hot property on its hands, and it's eager for the bidding to begin.

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