AT&T dumps Yellow Pages stake in desperation
Revenue from the print arm of the directory business has declined by nearly half over the past four years.
With this, AT&T will hold only a 47% stake in the division. AT&T had to sell at a depressed valuation, showing its desperation to get rid of a non-strategic business with declining revenue in the face of increasing online competition from Google (GOOG) and Yelp (YELP).
The move was not entirely unexpected. CEO Randall Stephenson had indicated in January that AT&T would divest or restructure "low-performing and non-strategic assets." AT&T's Yellow Pages arm has seen revenue falling drastically in recent years, primarily due to losses from its print media side. The online media arm of the business has been growing in strength, but not enough to make up for the massive revenue declines in its print media business. Revenue from the print media arm of Yellow Pages, which accounts for over 75% of the division's total revenue, has declined by nearly half over the past four years.
Valuation still very low
According to our valuation, the advertising and publishing division, also known as Yellow Pages, 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 far revenue 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 non-important 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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