Dial D for dividend and R for return

Yellow Pages (Singapore) makes a strong connection with investors hungry for yield, while returning roughly 300% to the private equity buyers in a year and a half.

Yellow Pages (Singapore) priced a strongly subscribed IPO on Friday despite the prospect of being swamped by far larger deals for the Suntec and Link Reits. The sale of 111 million shares raised S$185 million via bookrunner UBS and joint lead DBS.

The shares were sold at the top of the price range of S$1.46 to S$1.66 a share, with the order book closing eight times covered. Final allocations saw 60% of the deal go to Asia, 20% to Europe and 20% to the US. Some 5% of the transaction was sold to Singapore retail investors.

Although some bankers believed it might be unwise to go out to market at the same time as a large dividend deal like Suntec Reit, the strategy appeared to pay off after investors saw that their large liquidity-driven positions in the Reits would not amount to sizeable allocations. This excess liquidity was easily absorbed by Yellow Pages, which has committed to pay out 100% of its earnings as dividends in 2005, equating to a yield or around 7%.

The IPO represents the first time a financial sponsor group has been able to sell down a large majority of their holdings in an Asian IPO after a leveraged buyout. CVC and JPMorgan Partners originally bought the company in June 2003 from Singapore Telecommunications paying S$220 million. They injected a further S$6 million in working capital.

That S$220 million comprised S$5 million in share capital, S$90 million in a shareholder loan and the rest in debt. Since buying into the company, the sponsors also sold a S$30 million portion of the shareholder loan to mezzanine finance specialist Intermediate Capital Group and then in September 2004 issued a five year S$130 million bond through DBS.

After the IPO, Yellow Pages Singapore now has an equity value of $263 million, giving the sponsors a return of around 300% in around 18 months of ownership. The decision to go ahead with the sale so soon after buying into the company raised some eyebrows among investors.

However, the sponsors were keen to take advantage of a general re-rating of the global directory sector that has occurred since they made their initial investment. When they bought in, the price they paid equated to an EV/EBITDA ratio of 6.7 times 2003 earnings. Soon after that deal, Telecom Italia sold its Seat Pagine directories business at a multiple of 9.1 times.

At present, the valuations of the global comparables span: 8.9 times for Findexa of Norway; 10 times for Aniro of Finland; 11.5 for the UK's Yell; 12.8 for TPI of Spain and Portugal. At the IPO price of S$1.66 a share, Yellow Pages Singapore is valued at 10.4 times, or a 15.4 times 2004 earnings on a P/E basis.

The decision to go ahead so quickly was also driven by the fund raising activities of the sponsors. CVC is in the process of closing its latest Asian buy out fund, while JPMorgan Partners is expected to start raising a new Asian buyout fund in the New Year. Being able to show a general track record of exits, and in particular having such a glittering return as the Yellow Pages deal, will certainly help their cause.

The IPO was structured as a sale of 58.1 million primary shares and 53.2 million secondary shares. Almost all of the proceeds of the primary share sale go towards paying back the shareholder loan. Thus, while half the proceeds initially go to the company, almost all of them end up with the sponsors.

The IPO represents 70% of the equity of Yellow Pages Singapore with a further 10% available in a greenshoe, which if exercised will see the total sale coming up to 80% of the company. The sponsors are retaining the remaining 20%.

In this, the IPO sets a new standard for the size of free float that the Singapore market is able to take. Initial discussions between the sponsors, their banks, investors and the regulator settled on this amount, which will reduce the negative effects of a large stock overhang, while also keeping the existing owners incentivized enough to keep running the business.

In their short tenure as owners of the business, the sponsors have made one fundamental change to the business by introducing a direct to home delivery service. Under its previous ownership, people had to go to the Singapore Telecom head office to pick up a copy of the directory.

This led to low advertisement penetration rates with readers, as well as a low actual advertiser to potential advertiser metric. By delivering straight to home, more readers will see the book thus attracting more advertisers in to the directory.

The results of this move are not likely to be seen until the March 2006 results, due to the long lead time in selling ads into a an annual directory product. Yellow Pages (Singapore) starts trading on December 9.

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