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).

Catalyst
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).

Outcome
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.

Risks
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.

Potential
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.
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Location: Toronto, ON, Canada

6 comments:

  1. AnonymousJanuary 10, 2012 at 11:33 AM

    Agreed - assuming the banks dont pull the plug in 2013 on the credit line, CF (even with greater than current slide in phonebook revenue) can support the business for several more years if/as/when they transition the business. Again--the key here is the banks/lenders, as you noted.

    ReplyDelete
  2. Thom The AnalystJanuary 10, 2012 at 9:26 PM

    The investors on the debt have an incentive not to let the company fail: it is unclear--at least to me--that there would be enough value in a bankruptcy for them to be paid off in full. Shareholders should be fine as long as each of the banks in the syndicate agree. I ended up not investing (the price of the preferreds kept going up!) but it will still be interesting to watch from the sidelines.

    ReplyDelete
  3. AnonymousMarch 3, 2012 at 7:01 PM

    good call on the YLO prefs

    ReplyDelete
  4. AnonymousMay 12, 2012 at 5:00 PM

    Jan 9 pref A : 2.32
    may 11: 0.40

    good call?

    ReplyDelete
  5. AnonymousOctober 6, 2013 at 12:55 PM

    Did you hold your preferred shares until conversion?
    Was the trade profitable?
    If I recall correctly the pref. dividends were suspended.

    ReplyDelete
  6. Thom The AnalystOctober 16, 2013 at 9:42 PM

    Yes.
    No.
    Still holding the new common and warrants...

    ReplyDelete

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