DBRS Comments on Yellow Media’s Acquisition of Canpages; No Impact on Ratings

DBRS notes that Yellow Media Inc.’s (Yellow Media or the Company) agreement to acquire Canadian Phone Directories Holdings Inc. (Canpages) from HM Capital Partners for $225 million in total consideration does not impact Yellow Media’s current R-1 (low)/BBB (high)/BBB ratings. The trends remain Stable.

DBRS believes that this proposed acquisition will add to Yellow Media’s core directory business and will not materially impact its financial risk profile. From a strategic perspective, this will add to Yellow Media’s position with the addition of 84 directories (approximately eight million copies) while supporting the expansion of Yellow Media’s online presence – Canpages.ca currently reaches an average of 3.5 million unique visitors each month. DBRS believes Yellow Media’s digital transformation, which is supported by this acquisition, is a significant factor in assessing its business risk profile going forward.

From a financial risk perspective, DBRS notes that Yellow Media has continued to improve its leverage levels as part of its goal to target leverage of 2.5 times as it approaches conversion to a corporation. (DBRS notes that Yellow Media announced on March 24, 2010 that it will convert to a corporation on or around November 1, 2010.) This acquisition does not materially alter this expectation; the Company ended 2009 with leverage at just under 2.6 times as calculated by DBRS.

The $225 million acquisition consists of $75 million in cash and the issuance of $150 million of exchangeable notes to HM Capital that are convertible to equity beginning in Q1 2011 and must be converted upon maturity – should they not be redeemed at Yellow Media’s option beforehand. The acquisition of Canpages is subject to satisfaction of customary regulatory conditions.

Concurrent with the Canpages acquisition, DBRS notes that Yellow Media announced that its U.S. directory operations, YPG Directories, LLC, would be added to Ziplocal, LP in exchange for a 35% equity stake in the combined U.S. directory operation. While DBRS believes the loss of revenue and EBITDA from this exchange is negligible, it should give the U.S. directory operation greater scale while Yellow Media continues to own the information technology platform and centres of excellence that were originally associated with this acquisition. The U.S. exchange is expected to close on or about April 15, 2010.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Media and Entertainment, which can be found on our website under Methodologies.

This is a Corporate (Telecom/Media/Technology) rating.