After US$6.55bn of media directories deals completed so far this year, including two this week, the number is expected to dry up for the rest of the year, according to senior bankers.
The sector has averaged US$10bn in value each year since the start of 2000, according to Thomson Financial. But as it has just seen 19 deals since the start of 2005, activity could now dry up.
The two most recent deals were the sale of US directories company TransWestern to UK-listed Yell Group for US$1.575bn and Continental European provider Yellow Brick Road to a private equity consortium led by Australian bank Macquarie’s investment arm for US$2.3bn.
The deals provided exits for two sets of private equity consortia: Thomas H Lee and CIVC for TransWestern; and 3i and Veronis Suhler Stevenson for YBR.
Meanwhile, buyout firm Bain Capital has completed perhaps the quickest-ever flip of a directories business, buying Canada’s Advertising Directory Solution for US$1.54bn in September and selling it for US$2.08bn in March.
And the prices paid have been climbing, primarily as banks become more competitive to lend on big deals where there have historically been strong free cashflows. In directories, about 95% of earnings before interest, tax, depreciation and amortisation are converted into free cashflow, according to one banker in the sector.
This has allowed private equity investors to borrow more than the typical five to six times debt/Ebitda typical in a leveraged buyout. YBR is expected to reach more than eight times debt/Ebitda, while there was 7.25 times leverage on the Dutch VNU World Directories business sold to Apax Partners and Cinven for US$4.37bn in September.
The argument is that once directories’ extra rate of cash that is thrown off is taken into account, the relative multiple would appear lower. But investment bankers active in the sector still described the current multiples as “mad” and the top of the cycle.
Also, bankers that have concentrated on directories’ historic success in repaying loans and reaching ever-higher sales prices – TransWestern went for nearly 50% more than market expectations at the start of the year – could be ignoring a dramatic shift in business model: the move from paper to internet.
Rupert Shaw at GMT Communications Partners, a mid-market telecoms and media private equity specialist that has invested in the directories business, said there was a danger that people were ignoring the potential impact of the internet that could be “the business dynamic of the next five years”.
The new online entrants could take a significant slice of revenues or market share if the service offered was easy to use and free, according to Shaw.
But bankers close to the current round of deal activity counter this by saying accurate and relevant content is key and businesses with a strong brand will be able to capitalise on the shift.
This scenario, however, is still uncertain and it is likely that bankers will want their debt paid off sooner rather than later, and will be prepared to pay even more in the next round of deals to provide exits for current investors.