Issuer: Yell Group
Amount: £1.14 billion
Launched: July 1 2003
Bookrunners: Merrill Lynch and Goldman Sachs
Last month, Apax Partners and Hicks, Muse, Tate & Furst finally managed to send their problem child Yell to market. After fishing around for a few days bookrunners Merrill Lynch and Goldman Sachs found there were plenty of institutional investors interested in the UK telephone directory provider’s stock and launched the IPO on July 1.
The initial deal size was £850 million but investor demand took this to £1.14 billion ($1.8 billion), plus the greenshoe. Around 38% came from new shares and 62% from secondary shares. The deal was priced in the top half of the 250p to 300p range at 285p in just 10 days, rather than the usual six weeks. The bookrunners were able to accomplish this because investors were already familiar with Yell from last year’s failed attempt to take the company public.
While the Merrill and Goldman bankers were working on the flotation, bankers at ABN Amro and HSBC were putting together a £1.2 billion refinancing loan for Yell. The previous banking facilities were leveraged buy-out structured loans put in place in 2001 when Hicks, Muse and Apax Partners bought the company. Peter Ellemann, head of origination in loan syndication at ABN Amro, says it meant that “these facilities were highly constraining on what the company could do”. Refinancing also enabled the company to reduce its funding costs.
The bookrunners for Yell’s IPO say one of the main differences between this year’s deal and last year’s attempt was that the market was more receptive to new equity. Rupert Hume-Kendall, managing director in ECM at Merrill Lynch, says: “We found that when we brought the Benfield [a UK reinsurance broker] transaction [in mid-June] investors were very much open to IPOs and they had clearly built up liquidity over the last year ready to rotate into equity.”
Bankers attribute the failure to float Yell last year to the drastic drop in the UK equity market. “Between the launch and pricing of Yell last year the UK market fell about 20% and, within that, the media sector fell up to 40%,” says Hume-Kendall.
So what was different about Yell this year? The bookrunners argue that it has the key attributes for a good investment. “Yell has enjoyed steady growth in Ebitda, leading to substantially better cash net income and free cashflows which together help make, in my opinion, a compelling investment case,” says Hume-Kendall. Group-adjusted Ebitda was up 31.6% when Yell reported its annual results in March. Operating cashflow after capex was up 65.7% and revenue growth was 8.6%. As a result, it has been able to increase the dividend to 3% from the 1% it proposed last year. Yell’s integration of McLeodUSA Media, acquired in April 2002, is close to completion and $11 million of cost synergies have been realized.
However, Hume-Kendall admits that the enterprise value this year was not substantially different to last year’s. “It was within a similar range,” he says. “We priced the transaction off a range of £3.1 billion to £3.45 billion. Last year the range indicator was £3 billion to £3.5 billion,” he says.
Whatever their reasoning, institutional investors were happy to take up the issue. Matthew Westerman, managing director in the financing group at Goldman Sachs, says: “Eighty-five per cent of the people we saw came into the book.” In total, 67% went to UK investors, 18% to the US, 11% to continental Europe and 4% elsewhere.
However, not all investors were convinced, not least because last year’s attempted flotation sought £1.3 billion and this year Yell sold for £2 billion, according to Charles Scott Plummer, sales director at Bedlam Asset Management. He says: “The increase in revenues doesn’t increase the business value by £700 million.” He adds: “It came at a moment when the lemmings were thinking about getting back into equities.” Bedlam was also concerned that the bankers, owners and even Yell’s managers were selling out.
