Valuing a Cross-Border LBO: Bidding on the Yell Group
Introduction
The report presents a case about Apax Partners and Hicks, which are two of the biggest names in private equity industry.These companies were considering to acquire directories business of Yell from British Telecom (BT). The business was owned and operated in United Kingdom (UK) and United States (USA). The team of Apax Partner and Hicks were under pressure regarding the valuation of Yell because the deal was particularly critical to them due to the virtue of its size and complexity and would leave a mark on the reputation of both the private equity firms.
Problem Statement
The management of the firms were concerned about the valuation of Yell because the deal was particularly complex due to their cross border nature. Further, they were also concerned about the cash flow projections of the firms because the projections were based on the management’s estimates and an unreasonable forecast could significantly threaten the valuation of the firm.
Analysis
1. Is Yell a good buyout candidate?
Yell consisted of two main assets that include: BT Yellow Pages, the market-leading directory business in UK and Yellow Book USA, the market-leading independent publisher of business directories in US. These two segments not only operate in different markets but also have different characteristics of cash flow and growth rates.
The U.K.’s Office of Fair Trading (OFT) considers BT Yellow Pages as one of the leading segment of advertising services market and they are considering to impose a limitation on the annual increase in rates for advertising, which will undermine the attractiveness of the deal because a reduction in prices can significantly threaten potential revenue. Further, it is also unclear that how much sales revenue will be affected because it depends on such regulatory imposition. Some commentators believe that the government agencies will recommend a restricted growth in prices even far worst then the previous restricted amount and it has been estimated that the Office of Fair Trading (OFT) will cap the advertising price growth rates at 6% below the inflation rate.
Further, on the other hand, Yellow Book USA’s management was projecting a continued rapid expansion into new markets and they believe that they will generate a sustained future growth and high EBITDA margins from the business. Moreover, yellow pages advertising expenditures are considered to be more stable than other forms of media advertising and do not fluctuate widely with economic cycles, which reflects the attractiveness of the deal because the expected expansion in new market and the stability of expenditures will significantly increase the profits of the organization.
Dictionaries were considered as a “must buy” by many small and medium-sized businesses because the yellow pages were their principal means of reaching customers in UK. Further, it is also expected that US yellow pages are expected to expand in new market, so it seems to be a worthwhile opportunity for the firm to buy Yell because it will generate stable and predictable cash flow and provides an opportunity to achieve their mission in the long run.
2. How would you approach Yell’s valuation? In particular, how will your valuation incorporate the fact that cash flows are in pounds sterling and dollars?
Yell Group Ltd. was incorporated by British Telecom (BT) as a holding company for the yellow pages business in the UK and US, under pressure to reduce its heavy debt load. Yell had enjoyed tremendous success over the last few years and BT is considering to exit from the strategy but the exit strategy may raise certain questions about the valuation of the firm because both the segments are operated in different markets, which are susceptible to different exchange rates.
Although, the valuation of Yell was
was complicated due to the cross-border nature of the deal but in order to facilitate better valuation, it would be appropriate for the firm to choose a base currency for the valuation where the cash flows are converted into a single base currency and the suggested valuation techniques are adopted to determine the equity value of the firm.
In order to facilitate better valuation, UK business would be considered as a base currency for valuation. Initially, the US cash flows were discounted to the US rate and then it would be converted to US amount whereas on the other hand, UK cash flows were discounted to UK discount rate..................
Valuing a Cross-Border LBO Bidding on the Yell Group Case Solution
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A group of private investors should appreciate leveraged buyout of the business yellow pages, which operated in the United States and the United Kingdom. In the process, they have to deal with questions about how to conduct cross-border assessment and, as a sustainable business value cashcow with business growth. The case examines the economy and stimulate interest and are comparing different methods of evaluation - inflows of cash and free cash flow. For an executable tables (courses), please contact our customer service department at custserv@hbsp.harvard.edu. "Hide
by Mihir A. Desai, Mark F. Veblen, Paolo Notarnicola Source: Harvard Business School 17 pages. Publication Date: September 26, 2003. Prod. #: 204033-PDF-ENG
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