AT&T Ditches Majority Stake in Yellow Pages In A Desperate Move

AT&T (NYSE:T) announced Monday a majority stake sale of its advertising and publishing division to private equity firm, Cerberus Capital Management LP, for a total of $950 million in cash and debt. With this, AT&T will hold only a 47% stake in the division, more popularly known as Yellow Pages. ^[1] The depressed valuation at which AT&T has had to sell the business shows its desperation to get rid of a non-strategic business that has seen declining revenues in the face of increasing competition from online rivals such as Google (NASDAQ:GOOG) and Yelp (NYSE:YELP).

The move was not entirely unexpected as CEO Randall Stephenson had indicated in January that AT&T was looking “to either divest or restructure low-performing and non-strategic assets.” AT&T’s Yellow Pages business arm has seen revenues falling drastically in recent years primarily due to losses from its print media arm. The online media arm of the business has meanwhile been growing in strength, but not to an extent as to cover up for the massive revenue declines in its print media business. Revenues from print media arm of Yellow Pages, which accounts for over 75% of the division’s total revenues currently, has declined by nearly half over the past four years.

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Business has been declining, valuation still very low

According to our valuation, the advertising and publishing division accounts for about 2.2% of AT&T’s business value. At the current market capitalization of about $180 billion, the valuation of the Yellow Pages division comes to around $3.9 billion. However, at $950 million, for a 53% stake sale, AT&T has had to value the division at only $1.8 billion, less than half of our estimates – which indicates level of desperation to find a buyer according to our analysis.

We tweaked our model to estimate how pessimistically revenues for the print media arm of the Yellow Pages division would have to fall to justify such a depressed valuation. For $1.8 billion, the division has to account for only about 1% of the company’s business value, assuming that debt is proportionally divided across the divisions. Considering that the business is not very capital intensive, this is a reasonable assumption to make. That assumption made, we found that the revenues from the division’s print media arm would have to decline to nearly zero right from this very year in order to support the stake sale valuation. This is a sharp fall from the nearly $2.5 billion in revenues that we expect the business to have generated in 2011.

Turning to another declining metric of this business is EBITDA margin, which we currently forecast to decline in-line with the historical trend. We find that the margin would have to decline to about 10% from the current 30% levels and remain at these suppressed levels till the end of our forecast period to justify the valuation at which AT&T has decided to sell off a majority of its stake.

In recent years, AT&T has become increasingly focused on its mobile phone business, and this move could just be the first of many such similar divestment deals in the future. Next in line could be the phone landline division, which contributes less than 9% to the AT&T’s total business value. But in this case, AT&T may not value it at such depressed valuations or want to sell it off soon since this business is not strategically as unimportant as the Yellow Pages division has been.

AT&T’s shares fell about 1% in trading Monday after the deal was announced. Our price estimate for AT&T is $33.97, about 10% ahead of the market price. Once the deal is complete, it will have a negative impact on our valuations, as we valued this business much higher than the cash that AT&T got out of the stake sale.

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1. AT&T To Sell Advertising Solutions and Interactive Business Units to Cerberus, AT&T Press Release, April 9th, 2012 [↩]