If any one sector dominated the LBO market last year, it was yellow pages directories. Telecom giants like Qwest, Sprint and McLeodUSA all divested their yellow pages units, and LBO firms were more than willing to snatch up assets that offered stable, predictable cash flow and low capital requirements.
In most cases the sales were prompted by liquidity concerns, as many of the telcos had to come up with cash in the face of huge debt payments. The Bell Canada Enterprises directories unit, however, didn’t fit that mold, as the company sold the unit to Kohlberg Kravis Roberts & Co. and Teachers’ Merchant Bank in order to help facilitate the C$6.3 billion repurchase of BCE stock from SBC Communications. That aspect of the deal was one of a few that made this deal stand out from other directories acquisitions.
At C$3 billion ($1.9 billion), the deal was the largest LBO ever in Canada, surpassing the buying group’s own Shoppers Drug Mart acquisition. KKR and Teachers paid net cash of 8.5 times trailing 2002 pro forma EBITDA, a multiple that sits in the middle of the range of other similar deals in the directories space in 2002, which stretched from 6.9 times to 9.4 times EBITDA, according to estimates from RBC Capital Markets.
Moreover, through targeting a Canadian company, the buyers were able to capitalize on a number of factors unattainable elsewhere. For example, as part of the acquisition, the buying group was able to procure a 30-year non-compete clause that gives KKR and Teachers the exclusive, royalty-free use of the Bell Canada brand name and the “walking fingers” trademark. This is in contrast to the U.S., where the walking fingers logo is part of the public domain. The contract also includes a number of other long-term operating agreements, such as a nine-year billing and collection agreement, a license to get listing information and a two-year services transition agreement.
In financing the deal, KKR put up C$540 million for a 60% stake, while Teachers contributed C$270 million for a 30% share. Additionally, Bell Canada supplied a C$91 million equity portion, allowing it to hold on to 10% of the company. Bank of Nova Scotia, CIBC World Markets and Credit Suisse First Boston supplied the debt, which included a C$1.54 billion senior bank facility, made up of a C$400 million term A loan and a term B and C loan of C$1.14 billion. The lending syndicate also supplied a C$600 million bridge subordinated note and a C$100 million revolver, which as of press time had not yet been tapped.
Hatching the Deal
KKR had been looking at the yellow pages space for the past two years, and the firm first approached Bell Canada in the early spring of 2002, said Alex Navab, a partner at KKR. It wasn’t until later-after Bell Canada shook up its management team in April, with Michael J. Sabia replacing Jean C. Monty as CEO, and then announced that the assets were for sale-that KKR started to make some headway in its bid for the unit. The firm called on old friend Teachers’ Merchant Bank, who was also looking at a possible bid for the division, to join in on an offer.
Jim Leech, senior vice president of Teachers’ Merchant Bank, said, “Our phone calls virtually crossed. We saw it was too large of a deal to do by ourselves and KKR knew we could add value from a Canadian context.” Together, the consortium won an auction for the unit that reportedly included bids from Bain Capital, Thomas H. Lee and Onex Corp. Navab said that once the bids were made, “The value differential [of the offers] was inconsequential.”
“[Bell Canada] was looking to find the right long-term partner and also needed the certainty that the deal would close,” Navab said, adding that the Teachers’ Merchant Bank partnership also “comforted” Quebec-based BCE in the negotiations. Leech added, “A bid coming from a non-Quebec – let alone a non-Canadian – company could have faced some trouble.”
One thing KKR and Teachers liked about the deal was the opportunity to capitalize on the Canadian advertising market, which is “extremely attractive” for directories, Navab said.
“We’ve looked at the advertising industry in both Europe and the United States – and Canada, with a lot more small businesses relative to the size of the total economy, is more attractive for yellow page advertising,” he continued. “The total advertising dollars that go to yellow pages in Canada is 11%, versus just 5% in the U.S.” Navab added that in addition to the greater frequency of small businesses, there is also less competition in the local Canadian ad markets from TV, radio and cable than in the U.S. or Europe.
In facilitating the growth of the business, KKR and Teachers’ Merchant Bank will continue to partner with the existing Marc Tellier-led management team, which will also have an ownership stake in the company. Navab said the company is planning to direct a more aggressive advertising and marketing effort, stage a renewed commitment to customer service and maintain a vigilant stand against competition in the marketplace. He further mapped out that the new company will be unrolling a number of new products and bundles and will continually work on its cost structure as well.
KKR and Teachers’ Merchant Bank have not yet drawn up any exit plans for the directories business, although, Navab mentioned that if any attractive public offering opportunities arise, KKR will “entertain those,” with an eye at deleveraging the company.