A new financing at Yellow Pages (TSX:Y) reserves important flexibility that could result in the sale of the company, Canaccord Genuity analyst Aravinda Galappatthige says.
In a research update to clients today, Galappatthige maintained his “Speculative Buy” rating, but raised his one-year price target on Yellow Pages from $8.00 to $9.00, implying a return of 11.2 per cent to Monday’s closing price of $8.09.
On October 19, Yellow Pages announced it had closed a $315-million note offering that it said will be used to to redeem all of its outstanding 9.25 per cent senior secured notes due November 30, 2018.
Galappatthige says this development does not place barriers to the sale of Yellow Pages and offers that the company could, in fact, be a desirable target.
“While there may be mixed views on the financing terms, we believe that the structure of the new notes generally supports our preferred route of a sale of the company,” the analyst says. “On one hand, the 10% coupon was higher than expected, perhaps by 100-125bps. However, we place significant value on the immediate callability of the notes. Considering that asset sales are likely something the company looks at, we believe this flexibility is meaningful. At the same time, with respect to the prospect of a sale of the entire company, we believe it is important that the new notes do not stand in the way, as a likely buyer would prefer to utilize its own (potentially less expensive) debt structure. In our view, the new terms achieve that objective. We maintain our view that Yellow’s shareholders are best served by pursuing a sale process at this point. We believe that Yellow’s still meaningful FCF generation (nearly $100M in unlevered FCF going forward), and its customer base of approximately a quarter of a million SMEs, could present it as an attractive target to several strategic and financial buyers.”
Galappatthige thinks Yellow Pages will generate EBITDA of $174.1-million on revenue of $752.7-million in fiscal 2017. He expects those numbers will fall to EBITDA of $157.4-million on a topline of $702.9-million the following year.