British Telecom is contemplating ways to reduce their 28 billion pounds of debt, which has become unmanageable. The Yell holdings groups is a pairing of BT Yellow pages and Yellow Book USA but both firms operate in different economies. While the US company has exceptional growth potential, due to the monopolistic nature in the UK, there is to be growth and revenue restrictions imposed on the advertising revenue of BT Yellow Pages. By selling the Yell Group division, BT could take the estimated 2 billion pounds from the transaction and put it directing onto their current debt, helping reduce their debt burden.
BT, believing in the growth potential of the US market believes they can receive a premium for the Yell Group. Throughout the valuation process, average revenue may be inflated as well as expected new launches in the US market. An alternative to a friendly direct sale to the Apax / Hick’s partnership, or a different group of interested parties, would be to cut loose the company and divest them from British Telecoms. In this scenario, 1 billion pounds of BT debt would follow the Yell group and be removed from BT’s debt. The net result of this scenario is not as beneficial as a sale of Yell though, which is the preferred outcome of BT.
Creating an accurate valuation for the US portion of the business relies on accurate forecasting. There is 18 markets currently operating with Yellow Book, but the projected new launched are not guaranteed revenue streams. When creating the CCF model it was necessary to keep organic and new launch revenue separate for growth purposes. Using average revenue for new launches as $8. 1 million, and a growing EBITDA margin of 2%, and maxing out in 2005 at 25%, there are considerable revenues to be had in the US market place. The net working capital varies due to a change in accounts receivable and payable, and so using 12. % of revenue is a valid estimate. Using comparable beta values of other firms, the discounting factor for US Yellow Book is 8. 116% creating both present values for the terminal (perpetual) cash flows and the projected values for the next 6 years. Understandably, there should be little value placed on new launches, because until past numbers in the US don’t always translate with entering new, competitive markets. Appendix 1: BT Yellow Pages Valuation Appendix 2: BT Yellow Book USA Valuation Statement of Assumptions: Appendix 3: R0 calculations Appendix 4: Tax Shield Calculations and PV