Valuing a Cross-Border LBO

Bidding on the Yell Group

Introduction

Introduction

Classified Directories, UK, 85% Market Share

Independent Publisher, US, Marketing-Leading

Overview of LBO

LBO is the acquisition of a company or

division of a company using debt for a
majority of the purchase price and equity for
the remainder.

Overview of LBO
For this cross-border LBO, our team should:
Build our own projections for the UK and US business

Decide which method to choose for valuing the two business

Consider that the US and UK business operated using

different currency

Overview of LBO
A good LBO candidate will demonstrate many, if not all, of
the following characteristics:
Business Specific
Strong management team
Steady and predictable cash flow
Opportunities for immediate
Minimal required capital expenditures
Limited working capital requirements
Divestible assets over time
Industry Specific
High market share
Margins will not likely be pressured
Industry with high barriers to entry
Low cyclicality of industry
Viable exit strategy

Yell Operations
Steady Cash Flow
OFT Imposition
Additional Divisions
Ambitious Growth Plan
New Market Launches
Early Stage of Life Cycle

Yell Operations
Re-projection
BT Yellow PagesHistorical Financial Information and Pro forma for the Business, 19992005 (pounds in
thousands)

Year
Advertisement Volume (000)
Weighted Average Advertisement Price ()

Actual
Actual
Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma
31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07
813
853
909.298 969.3117 1033.286 1101.483 1174.181 1251.677
641
645
621.78
598.77
574.82
551.83
529.76
508.57

CCF Valuation for Yell Book

(dollars in thousands)
Actual
Actual
Pro forma Pro forma Pro forma Pro forma Pro forma Pro forma
Year
31-Mar-00 31-Mar-01 31-Mar-02 31-Mar-03 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07
Revenues (New Launches)
56700
64800
56700
64800
0
0
EBTIDA (New Launches) for 1st year
2,835
3,240
2,835
3,240
0
0
Revenues (Organic)
364,900
418,400
487,350
533,800
688,390
757,229
EBITDA (Organic)
62,033
79,496
102,344
122,774
172,098
189,307

Transaction Assumption
BT Yellow Pages has its price adjusted for inflation as stated by
the OFT.
The U.K. discount rate is calculated using the comps Telefonica
Publicidad e Informacion and Enriro.
The U.S. discount rate is calculated using McLeod USA and
World Pages.
The terminal value growth rate of BT Yellow Pages is 3.47%
which is a forecast of the compound average growth rate of FCF
from 2002 to 2007 based on our projection.
For the base case, the terminal value growth rate of Yellow Book
USA is 4.3% which is the historical growth of the RBOCs.
New launches in the U.S. are forecasted to return 5% EBITDA to
Sales in the first year.
Once launched, the new markets are assumed to reach organic
EBITDA margins in the following year.
The risk premium of both markets is set as 6.5%

Valuation Method
It is accepted that CCF valuation is widely used for LBO.
WACC is not applicable here because the calculation of WACC
assumes constant D/E ratio. Based on the debt repayment
schedule, it is unlikely that the firm will be able to maintain a
constant ratio. CCF is ideal for this transaction because the
debt repayment schedule is known in advance.

Yells two business line, BT Yellow Pages and Yellow Book

USA, operates and generates revenue from their respective
countries; therefore, we must look each asset as a separate
part.

Valuation Method
CCF Valuation for Yell Pages

Growth Rate

(pounds in thousands)

Year

3.47%
Actual

Actual

Pro forma

Pro forma

Pro forma

Pro forma

Pro forma

Pro forma

Terminal

31-Mar-00

31-Mar-01

31-Mar-02

31-Mar-03

31-Mar-04

31-Mar-05

31-Mar-06

31-Mar-07

(Perpetuity)

Revenues

521133

550185

565383

580399

593957

607832

622031

636561

Discounts and free ads

42,402

47,276

78,180

86,585

84,324

86,615

85,366

86,049

Direct costs

180,479

187,395

195,972

201,742

206,649

211,278

214,996

216,716

Overhead costs

102,530

88,870

74,930

77,137

79,013

80,783

82,204

82,862

EBIT

195,722

226,644

216,301

214,935

223,971

229,156

239,465

250,934

30%

30%

30%

30%

30%

30%

30%

30%

Tax Rate
EBIAT
Change in WC

137,005

158,651

151,411

150,454

156,780

160,409

167,625

175,654

10,570

12,772

2,178

6,000

8,497

6,300

4,375

2,023

Capex

7,380

9,760

10,220

9,730

9,230

8,380

8,000

8,000

Depreciation

5,530

5,370

6,130

8,850

8,400

7,630

8,000

8,000

124,585

141,489

145,143

143,574

147,453

153,359

163,250

173,631

1,878,027

FCF (main business)

Year
Discount Factor
PV of FCF
Sum of FCF

FCF (other business

0.78

0.69

0.61

0.54

0.48

0.48

112,366

102,092

93,935

88,461

83,234

900,280

-12,641

-8,238

1,362

1,956

10,000

20,000

153,409

-11,183

-6,447

943

1,198

5,419

9,588

73,541

1,508,771

-4,566

-14,438

PV of other UK businesses

Sum of PV of other UK business

0.88
128,403

73,058

Valuation Method
Debt schedule for Yell Pages

(pounds in thousands)
Year

Actual

Actual

Pro forma

Pro forma

Pro forma

Pro forma

Pro forma

Pro forma

31-Mar-00

31-Mar-01

31-Mar-02

31-Mar-03

31-Mar-04

31-Mar-05

31-Mar-06

31-Mar-07

Senior Term Loan A

47,400

47,400

43,450

37,525

29,625

19,750

Tax shield (t x interest payment)

14,220

14,220

13,035

11,258

8,888

5,925

13,179

12,214

10,376

8,305

6,077

3,755

14,263

14,263

14,263

14,263

14,263

14,263

4,279

4,279

4,279

4,279

4,279

4,279

PV of tax shield

53,906

Senior Term Loan B

Tax shield (t x interest payment)
PV of tax shield

19,690

Senior Term Loan C

Tax shield (t x interest payment)
PV of tax shield

20,142

3,956

3,658

3,382

3,128

2,892

2,674

14,700

14,700

14,700

14,700

14,700

14,700

4,410

4,410

4,410

4,410

4,410

4,410

4,068

3,753

3,462

3,194

2,946

2,718

53,750

53,750

53,750

53,750

53,750

53,750

16,125

16,125

16,125

16,125

16,125

16,125

14,560

13,147

11,870

10,718

9,678

8,739

5,400

5,400

5,400

5,400

5,400

5,400

1,620

1,620

1,620

1,620

1,620

1,620

1,537

1,458

1,384

1,313

1,245

1,182

Revolving Credit Facility

7,900

7,900

7,900

7,900

7,900

7,900

Tax shield (t x interest payment)

2,370

2,370

2,370

2,370

2,370

2,370

2,196

2,036

1,887

1,748

1,620

1,502

High Yield Bond

Tax shield (t x interest payment)
PV of tax shield

68,712

Vendor Loan
Tax shield (t x interest payment)
PV of tax shield

PV of tax shield
Total PV of tax shield

8,118

10,990
181,558

Amount

Interest

600,000

7.90%

175,000

8.15%

175,000

8.40%

500,000

10.75%

100,000

5.40%

100,000

7.90%

Valuation Method
CCF Valuation for Yell Book

Growth Rate

(dollars in thousands)

Year

4.30%
Actual

Actual

Pro forma

Pro forma

Pro forma

Pro forma

Pro forma

Pro forma

Terminal

31-Mar-00

31-Mar-01

31-Mar-02

31-Mar-03

31-Mar-04

31-Mar-05

31-Mar-06

31-Mar-07

(Perpetuity)

Revenues (New Launches)

56700

64800

56700

64800

EBTIDA (New Launches) for 1st year

2,835

3,240

2,835

3,240

364,900

418,400

487,350

533,800

688,390

757,229

EBITDA (Organic)

62,033

79,496

102,344

122,774

172,098

189,307

Total EBITDA

64,868

82,736

105,179

126,014

172,098

189,307

EBIT

58,628

74,826

97,749

117,204

164,098

181,307

35%

35%

35%

35%

35%

35%

Revenues (Organic)

Tax Rate
EBIAT

38,108

48,637

63,537

76,183

106,663

117,850

Change in NWC

37,596

43,108

50,212

54,998

70,925

78,018

Capex

10,600

8,700

8,170

8,990

8,000

8,000

6,240

7,910

7,430

8,810

8,000

8,000

-3,848

4,739

12,585

21,005

35,738

39,832

522,236

0.89

0.79

0.71

0.63

0.56

0.50

0.50

-3,428

3,761

8,897

13,228

20,049

19,907

260,992

Depreciation
FCF
Year

Discount Factor
PV of FCF
Sum of FCF

323,406

Converted to Pound by spot rate

224,588

Valuation Method
Total Value of Yell Group (000)

1,987,974

Acquisition Fee with 5% transaction fee (000)

2,087,373

Sensitivity Analysis
Sensitivity in Yell Pages to regulartory imposition
(Keep the terminal growth rate at 3.47%)
Acquisition Fee with 5% transaction fee (000)
2,087,373
Sensitivity in Yell Page to Growth Rate
Acquisition Fee with 5% transaction fee (000)
1,949,762
1,992,235
2,038,940
2,147,853
2,211,879
2,283,871

Growth Rate
2,087,373
3.47%
2.00%
2.50%
3.00%
4.00%
4.50%
5.00%

Sensitivity in Yell Book to Growth Rate

Acquisition Fee with 5% transaction fee (000)
2,087,373
2,049,580
2,058,603
2,068,657
2,107,134
2,123,757
2,143,038

Growth Rate
4.30%
2.50%
3.00%
3.50%
5.00%
5.50%
6.00%

2,302,097
2,527,057
2,762,573
3,009,062

imposition
-6.00%
-5.00%
-4.00%
-3.00%
-2.00%

Sensitivity in Yell Pages to EBITDA margin of new launches

Acquisition Fee with 5% transaction fee (000)
Margin
2,087,373
2,085,640
2,086,506
2,088,239
2,089,106

Sensitivity to risk premium for both markets

Acquisition Fee with 5% transaction fee (000)

Premium
2,087,373

2,399,743
2,232,233
1,960,880
1,849,488

5.00%
3.00%
4.00%
6.00%
7.00%

6.50%
5.50%
6.00%
7.00%
7.50%

Conclusion
We viewed Yell as a compelling investment
opportunity, particularly in light of the
companys growth potential, low valuation and
leverage capacity. This deal will leave its mark on
the reputations of both PE firms.

Thank You!