How to do a rescue rights issue: Yell

November 10, 2009

On Friday last week, the market value of Yell was 346 million pounds. On Tuesday the company revealed plans to raise 660 million pounds in new equity – and the share price went up. This is either a demonstration of the investment banker’s art, as practised under Yell’s new chairman Bob Wigley, or it’s a realisation that the Yellow Pages business is not quite the dinosaur that so many suppose it to be.

The poor shareholders do face pretty severe dilution. Even if they subscribe in full to their one-for-one offer at 42p, one-third of the enlarged equity will be sold to outsiders, but it could have been worse. After the company’s near-death experience, the price is a narrow 12.5 percent discount to Monday’s close (and a mere 5 percent discount to Friday’s close) marking a healthy contrast to the usual massive discount on recent issues.

The fees, on the other hand, are eye-watering. At 75 million pounds the advisers eat 14 percent of the gross amount raised, but at least they will have had to work for it, corralling hundreds of lenders into agreeing new terms, and staying on the underwriting hook for the next fortnight. There’s also a neat twist; thanks to Yell raising more than the 500 million pounds minimum, the cost of the new debt will be cut by 25 basis points.

While this move ensures the company ‘s survival, it will be a long slog back to health. Trading remains miserable, and any slowdown in the rate of quarter-on-quarter decline owes more to last year’s poor results than to any real improvement. Debt is still 3.2 billion pounds, or 5.3 times EBITDA, a ratio that must come down below 3.5 before Yell could consider resuming dividends.

Long before then, there will be further fund-raising. The company’s debt costs around 9 percent, and a bond issue would surely be highly popular at significantly less than that. Yell is cash-generating, with sales of around 2 billion pounds, and with the old shares at 47.5p, the new capitalisation will be just over a billion pounds.

The yellow doorstoppers are in steady, but not precipitous, decline, and Yell is in the three economies (UK, US and Spain) where the debt burden, both private and public, looks most intractable. The shares are essentially a bet on the speed of recovery in the three nations, and in the circumstances, for Numis Securities’ Lorna Tilbian to raise her rating on the shares from Reduce to Hold almost looks like a vote of confidence.


Neil Collins is a shareholder in Yell

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