| As we have mentioned in our recent research update on Yellow Media, equity of Yellow Media is created at substantially more attractive multiples of 2013 est. EBITDA, compared to the valuation of DXM equity. Moreover, investors are creating Yellow Media stock at 2.3x multiple of 2013 EBITDA, which is substantially cheaper than DXM debt multiple creation at all silos, including SuperMedia, Dex East, Dex West, and RHDI. We are showing in this blurb that this discrepancy cannot be justified by anything else except the market ignorance.Sales declines at DXM silos have been steeper, compared to those at Yellow Media.
Increase in digital sales in Canada is going to be more sustainable and less competitive than in the U.S., mainly because the advertising market in Canada for small business owners is less fragmented than in the U.S. Percentage of sales generated by bundle products (print + digital) has declined for Yellow Media from 65% in 2010 to 61% in Q1 2013. But it is still higher than low 50% range for Dex Media and 40% range for SuperMedia. As such, Yellow Media will have fewer problems than DXM in offsetting declining print sales by increasing digital sales.
Larger advertisers reduce advertising spending less than smaller do – both in Canada and in the U.S. Full average sales per customer were declining by 8.3% in 2012 but the rate of decline was descending through 2012, and it has become only (-2.7%) in Q1 2013. We believe that the rate of decline per customer at DXM is higher.
Renewal rate for both Dex One and particular Supermedia is admittedly lower than 86% at Yellow Media.
We see the only potential operational benefit of DXM in the quality of its digital platform and synergies between Dex One and SuperMedia. But they are not supposed to offset the huge difference in valuation multiples between two companies. As such, the stock of Yellow Media should be considered cheap – please refer to our recent research update on the website www.researchdistressed.com
Another avenue to explore in regards to structural drivers behind the spending trends for advertising by small business owners is related to … real estate. Small business owners used to finance their businesses through equity lines in their houses. You may not believe it from the height of your office, but that’s the reality. As such, the recent equity weakness is likely correlated on technical basis with the cost of capital available for real estate and to cap rates in apartment REITs. Please see the chart of apartment REITs index performance (BBEAPT Index on Bloomberg). You can purchase some real estate in the U.S. at cap rates close to 3.0%, which is incredibly low!
For more on professional stressed and distressed research, please refer to MANR on Bloomberg and to www.researchdistressed.com For less, please call your investment banking desk analyst. |
