Marc Tellier, CEO of Yellow Pages Canada, photographed in his Montreal office. October 1, 2009.John Morstad/The Globe and Mail
The banks that helped fund an acquisition spree by Yellow Media Inc. demanded that it reduce its debt load, forcing the elimination of its dividend and deepening the crisis of confidence that surrounds the publishing company.
By cutting the payout to shareholders, the company has entered a new phase – one in which it will preserve its cash and try to transform itself from business that relies on printed advertising directories to a digital marketing agency.
But the move also alienates thousands of individual shareholders who had invested in the company for its once-rich payout. Many of those investors sold yesterday, driving the company's stock price down more than 50 per cent, to 28 cents. It went public at $10 during the early years of the income trust boom, in 2003, and has traded as high as $6.40 this year.
For months, chief executive officer Marc Tellier has been under pressure amid signs that Yellow Media's revenue and cash flow were declining, making it harder for the company to carry its debt load of more than $2-billion. But in August, its debt when its debt was downgraded by two separate ratings agencies, triggering a key condition on a lending agreement under which it had the ability to borrow up to $1-billion from a group of banks.
According to the banks' terms, once downgraded, the company would no longer be allowed to pay a dividend to its common shareholders. Under a new agreement announced Wednesday, Yellow also agreed to pay down its bank debt and cut its credit facility in half, to $500-million. Starting in January, it will pay down $25-million of bank debt every three months.
"We believe with the renewed agreement we've struck with the banks, with the continued ability to generate cash flow from the business … we continue to believe we'll be able to deal with our future obligations," Mr. Tellier said in an interview.
Following the news on Wednesday, rating agency DBRS handed out its second downgrade in two months to Yellow's debt, now saying that it is "speculative credit quality."
"The downgrade is a result of increased uncertainty around the business risk profile and the reduction in financial flexibility and liquidity," DBRS analyst Chris Diceman said in an interview. The trigger on the banks' lending terms is "an important milestone," he added. "It clearly shows the banks, as active lenders, are watching this very closely."
Yellow Media announced that in the last three months, it has used all of the proceeds from this summer's sale of its Trader Corp. unit to pay down $700-million in debt, in a sweeping effort to clean up its balance sheet and reduce its financial risk.
Mr. Tellier did not take analysts' questions on the conference call Wednesday morning, which lasted less than ten minutes.
Mr. Tellier also announced that in its third-quarter results, which will be released in early November, it would take a $2.9-billion goodwill impairment charge, the result of a review of the company's operations that found its "fair market value" is lower than previously thought.
In August, the company cut its dividend from 65 cents to 15 cents per year in a move to save money and reduce its debt. With the $700-million in reduction in the last three months, the company's debt now sits at roughly $1.8-billion, Mr. Tellier said. Cash from the further cut announced on Wednesday will also be used to pay down debt, he said.
"While the elimination of the dividend will lower the pressure on cash use, the reduced banking facility and continued pressure on the company's business from the decline in print continue to unbalance its financial position," Desjardins analyst Maher Yaghi wrote in a note on Wednesday morning.
"Obviously the bankers have put a gun to their head," said one analyst speaking on condition of anonymity. "… But in terms of bringing the company back to financial health, that is something they have to execute their way to with real revenue growth."
Yellow Media's management has been increasingly criticized by analysts for having a financial structure – and a debt load – that is out of step with the challenges facing it, and a transformation that is putting pressure on its earnings. In August, ratings agency Standard & Poor's downgraded the company's corporate rating to speculative or junk status – to double-B-plus from triple-B-minus. At the time, DBRS also downgraded the company's debt to "adequate credit quality," with negative trends.
Earlier this month, chief financial officer Christian Paupe was asked to step down.
"Everything is fundamentally dependent on the company continuing to execute and mitigate those losses on the print side," Standard & Poor's credit analyst Madhav Hari said in an interview. "This company's earnings are going to be quite volatile going down the road."
Mr. Tellier said he hopes that the reduction in debt will allow the company to focus on building its digital businesses. The operational review and goodwill writedown represented the strongest statement yet by management of just how uncertain its transition will be.
"Clearly the market is taking a view that there is some execution risk against the strategy," Mr. Tellier said. "There's a strong conviction behind the fact that we feel we have the right strategy … This is now a show-me story as opposed to a trust-me story in terms of our ability to execute."