Monday, January 9, 2012

Yellow Media Inc. Preferred Shares

There's a funny thing happening in Yellow Media's securities.  Others have spotted this idea too and commented elsewhere but here it is for those who have not focused on this (after losing over 97% of its value in 2011 this penny-stock may not be on people's radars anymore).

Two key events are likely to happen in March 2012:
  1. Yellow will pay a quarterly dividend on its preferreds ($0.265625 on the series 1).
  2. Yellow will convert the preferreds into common (at a ratio of 25/2 common shares per series 1 preferred share).

At Friday's closing prices, this means that holders of series 1 preferred shares will get a $0.95 profit, or 43%. Link to spreadsheet.

The stock is priced how it is due to concerns about the viability of the business.  Yellow took on a mountain on debt during its life as a high flying income trust and continued to pay-out too much cash even after converting to a corporation (the dividend was discontinued in 2011).  Investors are concerned about management's ability to complete the transformation from a telephone book maker to an internet/e-media services company.

Can they survive?  If its lenders continue to support the business, there seems to be enough cashflow to continue servicing its debt:
  • The company made $166mm of EBITDA (51.3% margin) in the three months ending September 30, 2011.
  • (LTM EBITDA)/(Interest) was 6.1X, and (net debt)/(LTM EBITDA) was 2.5X. 
From a value perspective, let's assume book value per share is a good starting place.  Let's further assume that 100% of intangible assets will need to be written off and 10% of goodwill (they already wrote down $2.9B in Q3 2011).  That takes book value down to about $0.27.  If you believe all that, it is still about a 66% profit.  Link to spreadsheet.

What do you think of this opportunity?

Disclosures: I am looking at this opportunity and may buy series 1 preferred shares before the ex-dividend date.
UPDATE (1/31/2012): long position in preferred shares.