Sunday, July 01, 2007

Beauty is in the Eye of the Beholder

Close followers of events in corporate Singapore were mostly fixated on the saga surrounding Yellow Pages (Singapore) Ltd (SIN:Y07) (YPG SP) last month. Yellow Pages' undemanding valuations were first pointed out in early Dec 06 to readers of MOS. It was trading at S$1.12 then and has since closed at ~S$1.40, chalking up a tidy 25% gain in 6 months. Besides MOS, there are several other prominent institutional investors who have taken a position in the counter. The largest being Third Avenue which holds about 16%. Others include Marathon Asset Management and Sleep, Zakaria & Co.

Much has been said about the attempt by Global Advisory's to install new independent directors that there is probably no need for us to weight in on the matter. Instead, we think that investors may instead be more interested in the worth of an asset whose value may not be immediately apparent. After all, Yellow Pages is the business of producing print directories, a product whose relevance in the digital age may be questionable. Whilst we beg to differ on this point as there may yet still be value which the firm may unlock by focusing on niche local directories, the focus of this post is not on its business model. Instead, MOS hopes to share why the counter appears cheap in terms of its private market value even at today's prices.

Directory services have repeatedly been the target of private equity firms as its stable cash flow generating ability allows the acquirer to gear up to increase the IRR. As recently as March 2007, Yellow Pages NZ was sold to a private equity consortium consisting of CCMP Capital Asia and Teacher's Private Equity, the special investment arm of Ontario Teacher's Pension Plan for NZ$2.24 bil. CCMP Capital Asia is formerly the private equity fund of JP Morgan. The transacted EV/EBITDA multiple was 13.6x for Yellow Pages NZ which had a EBITDA margin of 58%. In 2001, several equity firms also teamed up to buy out the Yell Group, the UK Yellow Pages at an EV/EBITDA of 9.7x, when the latter had an EBITDA margin of 27%. The venerable KKR had also teamed up with Ontario Teachers to gooble up Yellow Pages Canada in Sept 02 at an EV/EBITDA of 8.8x. In fact, the global average transaction multiple may be ~11.7x since 1999.

As for Yellow Pages Singapore, even though its EBITDA margin is falling, it still commands a respectable 44% in 2006. Pegging the take-over EV/EBITDA of 9.7x for Yell which had an inferior EBITDA margin of 27%, the fair value of Yellow Pages Singapore may be in the range of S$2.00. Hence, this clearly hints at a possible arbitrage at private and public market values. Whilst the public investors may not fancy owning such an "old economy business", private equity firms have been lapping them up with great enthusiasm. This is clearly a case of beauty being in the eye of the beholder.

Of course, the above simplistic analysis does not take into account the maturity of the markets and the potential for re-structuring for each firm. It is merely intended to invoke critical thinking and discussion.