Frontenac, BMO Halyard Find Value In Yellow Pages –

Frontenac Company and BMO Halyard Partners have created their own yellow-pages platform company, joining the throng of other private equity shops that have swarmed to the directories space in search of safer investments.

In step with Frontenac’s “CEO first” strategy of investing, the buying group’s primary objective was to align itself with an industry veteran. The firm found one in Erik C. Jensen, formerly the chief operating officer of the Louisiana-based Sunshine Pages, who along with Frontenac and Halyard partnered up to form ypOne Publishing. Walter Florence, a principal at Frontenac, noted that Jensen, who now heads ypOne as CEO, was integral in the company’s formation. “We’re focused on backing strong operating partners. We were looking for a proven executive with plenty of experience in publishing, and Erik fits that mold,” Florence said.

Once the operating team was established, Frontenac and Halyard lined up three acquisitions, all of which closed earlier this year, and ypOne has already signed a letter of intent for a fourth purchase as well. The company started with the acquisition of Southern Directories of Texas and quickly followed that by snapping up Golden Triangle Telephone Directory, also based in Texas, and Southern Directories of Arizona. The terms of these deals were not disclosed, although Florence did indicate that Harris Nesbitt provided debt to help finance the transactions.

Much like other LBO firms in the directories market, Frontenac cited the high margins and consistent growth typical of yellow pages businesses as particular draws to entering the industry. Yet this investment differs from others in that it is focused on accumulating smaller independent companies, rather than the larger incumbents.

“We’re looking to acquire companies in the $5 million to $10 million revenue range,” Florence said, adding that eventually he expects ypOne to be a $50 million to $100 million company. Initially, ypOne will look to grow through acquisitions in the Houston marketplace, in order to build its market share there, and eventually the company will fix its sights on new markets that “hold equal or better potential.” He also specified that ypOne is targeting well-established publishers with a strong sales force.

Florence identified two drivers that benefit the smaller independent players that ypOne is targeting, noting first that the independents generally price their ads at a 15% to 40% discount compared to the larger incumbents, which allows the little guys to offer more bang for the buck. Additionally, he cited that the independents are geographically positioned to target the small local businesses, and since the independents are smaller in scope, they can be more innovative and direct in their approach.

Down the road, Florence sees Frontenac exiting the investment through either a recapitalization or a sale to a strategic buyer. He added that given the recent focus on local advertising, he wouldn’t be surprised if separate local media outlets expressed interest as well, as a way to add to their offerings. He noted that Frontenac typically holds onto an investment for between three and seven years.

Frontenac used its Frontenac VIII LP fund for the investment, which closed in 2000 with $560 million of capital under commitment.