In what could be a precursor to a public offering, 3i Group and Veronis Suhler Stevenson merged their band of yellow pages businesses into one pan-European holding company, christening the business Yellow Brick Road.
The inception of Yellow Brick Road began with the tandem’s acquisition of Sonera Info Communications (later renamed Fonecta) in a $96 million deal in March 2002. In 2003, 3i and Veronis then carved out the directory publishing business of Royal KPN in a roughly $500 million acquisition, and later that same year, purchased six European directory operations of Verizon Information Services in a transaction that VSS Partner Marco Sodi described at the time as “north of $200 million.”
Jonathan Russell, executive director at 3i, noted that through the buy-and-build strategy employed by the investor group, “We have been able to free up businesses owned by some larger groups and create a business with some scale.”
While the consolidation of the three businesses is not totally unexpected, Veronis and 3i did not necessarily draw up the play with a merger in mind. “It was to some degree part of the blueprint, but also what came about because it made sense as the investments started to take shape,” VSS Managing Director J. Morgan Callagy said. “We originally identified this as a sector where a buy-and-build approach would work, and after the second acquisition we started to look more closely at this.”
He added, “It gives the company better access to the financing markets, and makes it more attractive for an IPO or income trust-type of vehicle, such as those in Canada.”
The directories space has recently been reflecting more green than yellow for private equity investors, and has already proven adaptive to the public markets. Hicks, Muse, Tate & Furst and Apax Partners floated Yell Group last year in an IPO on the London Stock Exchange, valuing the company at roughly $3.2 billion. Kohlberg Kravis Roberts & Co. and Teachers Merchant Bank, meanwhile, accessed the red-hot income trust market in Canada for the floatation of Bell Canada Enterprises’ former yellow pages division. Directories businesses, with consistent and steady cash flow, seem to be a perfect match for the income trust market, which closely resembles a REIT in the U.S., and values low-growth businesses with high cash flows.
While Europe has not yet established anything modeled after Canada’s income trust, Callagy believes it could be in the offing. “We’re hearing rumors that there are already businesses actively looking at it,” he noted. “It’s something that really intrigues us, but for now we have a lot to do with this business and we believe there’s still a lot of upside left.”
Alongside the merger of the three businesses, the new company was able to refinance all of its debt. A team comprised of CIBC Capital Markets, ABN AMRO and BNP Paribas provided the financing, contributing a total of EURO1 billion in senior and mezzanine debt facilities. Callagy said that through the transaction, VSS and 3i will be able to return roughly EURO280 million to limited partners, roughly equal to the group’s invested capital.
The combined company will have a reach into Finland, the Netherlands and Central Europe, and is expected to generate EBITDA of EURO160 million. Additionally, the group has already found synergies saving around EURO6 million to EURO8 million from the consolidation.
While Fonecta, Telefoongids and Mediatel will now operate under the same umbrella, it does not mean their businesses will necessarily churn out identical product offerings. “The merger will allow for better communication among the companies,” Callagy said. “But this is more of a legal merger rather than actually putting the companies together. Each company will continue to operate independent of each other.” As the new company moves forward, 3i and Veronis will continue to pursue additional acquisitions. The business is already the seventh-largest directories business in Europe on an EBITDA basis.