1. Is Yell a good leveraged buyout candidate?

Yell currently has two well-established business lines that are competing in two
different markets. While the environment is different in each market, Yells
business lines achieve somewhat steady cash flows that are on pace with
market growth, even with the forthcoming Office of Fair Trading (OFT) imposition
to limit annual increases in advertising rates in the U.K. market. The projected
EBITDA for both BT Yellow Pages in the U.K. and Yellow Pages USA combined are
more than enough to cover the considerable interest expense. Furthermore, the
capital intensity to expand in the market (i.e. through new market launches in
the U.S.) is relatively low compared to other industries. With that being said,
good buyout candidates also have a strong and defendable market position. This
is true for both lines with BT Yellow Pages as a market-leader in the classified
directory business and Yellow Pages USA as a market leader in the independent
publisher of business directories. Finally, given that financial buyers are
interested, these business lines are relatively easy to divest should the need
arise.

2. How similar/different are the UK and the US businesses?

The U.K. business is subject to heavy regulation which will restrict the price.
Thus the only way to expand profits is through the advertisement volume.
Unfortunately, the growth in the classified directories advertising market has
been declining over the last few decades and will probably continue in this
fashion even though the total advertising market has seen increasing growth.
The saving grace for this business could be the additional divisions that BT
Yellow Pages owned. While these divisions were in the start-up stages, the
growth opportunities would be more significant than the core business. The U.S.
market was significantly different as the independent directory providers
represented an area of substantial growth potential. The regulatory framework
did not inhibit the pricing although new product launches were naturally volatile
in their success. In terms of the industry life cycle, BT Yellow Pages is most likely
in the late maturity / early decline stage while Yellow Pages USA was still in the
growth phase. These factors combined with the buyers investment horizon will
influence their exit strategy.

3. Assess management projections and consider which assumptions to alter in each

business.

Management provided Apax and Hicks Muse team with projections for both BT Yellow Pages and
Yellow Book USA based on what a potential buyer should expect in the upcoming years. Since
management is trying to sell the business, we have to be skeptical at the assumptions used to come up
with these projections. As a financial buyer, you tend to leave the day-to-day operations with

management and thus would hope that they can meet their projections. These numbers should be
viewed with a grain of salt, as management would want to make the company look as attractive as
possible to potential buyers.
For BT Yellow Pages, their growth is driven by two main factors number of advertisements sold
per year and advertisement prices. Thus, as a potential buyer, these areas need to be scrutinized and
scrubbed to come up with a justifiable projection. The year-over-year advertisement volume from
2001 to 2006 is decreasing. For SMEs, BT Yellow Pages were considered a must buy, yet the
volume projection is trending downward. Since economic cycles tend not to influence this industry, it
is vital that we figure out why the trend is not positive. A potential reason could be reliance on online
services vs. physical paper directories. Sensitivity analysis should be applied to see how a further
decrease in volumes would affect the overall valuation. For advertisement prices, the trend is slightly
increasing from 2001 to 2003 and flat thereafter. Management seems to be more optimistic here as
the OFT is on the verge of placing a cap on advertising price growth. Since the cap is based on
inflation and the fact that inflation is decreasing, the advertising prices should be adjusted to show a
decreasing trend.
The year-over-year revenue growth for Yellow Book USA ranges from 10.0% to
15.0% with an average of 12.5% and a CAGR of 12.4%. Organic growth in the US
market is 4-5% and so the additional growth for Yellow Book USA must be
coming from new market launches as well as increasing market share as an
independent publisher. The growth rates seem quite aggressive and so
additional new market launches may be required in years 2005 and 2006,
currently not projected, to ensure that there is a buffer to hit revenue
projections. It may make sense to also decrease the revenue growth rate to
portray a buyers more realistic base case and use managements case as an
upper limit case. Given that management combined total revenues, revenues
would need to be broken out between organic and new market, as these result
in different EBITDA margins. CAPEX and depreciation also need to be reviewed
as they are interconnected an increase in CAPEX usually means an increase in
depreciation and vice versa. Overall, the numbers for both markets should be
viewed with skepticism as these are management projections and may not
reflect the buyers expectations in terms of the growth in the market.