Question 1: Is Yell a good leveraged buyout candidate?

Yell is a strong leveraged buyout (LBO) candidate based on the following factors:
1. Stable Cash Flows: Both BT Yellow Pages in the U.K. and Yellow Book in the U.S.
operate in the classified directories industry, which historically has demonstrated
stable cash flows. Advertisers view these as essential platforms, particularly for
SMEs.
2. Market Leadership: BT Yellow Pages holds a dominant 85% market share in the
U.K., while Yellow Book is the leading independent player in the U.S. These
positions provide competitive advantages and pricing power.
3. Cost Efficiencies: There are opportunities for operational synergies and cost
reductions post-acquisition, as evidenced by the overlap in operational expenses
between the U.K. and U.S. businesses.
4. Potential for Growth: Yellow Book's projections include aggressive expansion in the
U.S. market, leveraging the ongoing trend of independents gaining market share over
RBOCs.
5. Low Capital Expenditure Needs: Beyond new market launches in the U.S., the
businesses require modest capital expenditures, making them well-suited for debt-
heavy financing structures.
6. Debt Capacity: The business structure and predictable revenues make Yell capable of
servicing high leverage, which is a key aspect of LBO deals.
However, there are risks which are as follows:
1. Regulatory Issues: The U.K. Office of Fair Trading’s restrictions on price increases
could impact the valuation and profitability of the U.K. business.
2. Execution Risk: Yellow Book USA's growth depends on successful execution of its
expansion strategy, which may require significant upfront investment.

Question 2: How similar are the U.K. and U.S. businesses?

While both businesses operate in the classified directories industry, they differ significantly:
1. Growth Projections:
o BT Yellow Pages in the U.K. assumes flat advertisement volumes and minor
growth in prices but faces regulatory risks.
o Yellow Book in the U.S. assumes rapid expansion through organic growth and
new launches, with aggressive revenue projections.
2. Market Dynamics:
 o The U.K. business operates in a near-monopoly environment with predictable
revenues but is subject to regulatory scrutiny.
o The U.S. market is more fragmented, with independents gaining market share,
creating both opportunities and risks.
3. Revenue Assumptions:
o BT Yellow Pages assumes consistent advertisement volume and pricing, which
seems reasonable given its historical performance.
o Yellow Book's new market launches assume first-year revenues of $8.1
million per directory, with EBITDA margins improving significantly by the
second year. These projections seem optimistic and may need to be revised
downward.
Yellow Book's management forecasts appear overly optimistic, particularly for new launches
& U.K. projections are plausible but need adjustment for the regulatory cap, potentially
lowering the revenue growth assumption.
U.S. projections for rapid revenue growth and margin improvement appear optimistic. A
realistic model would:
 Segregate organic growth from new launches.
 Apply conservative margins to new markets initially, considering high promotional
costs.
If I were part of the Apax/Hicks Muse team, I’d moderate these projections to reflect realistic
growth and margin targets. I would revise assumptions by reducing the expected revenue per
launch and extending the time to achieve mature EBITDA margins.

Question 3: How does Yell’s projected debt affect its valuation?

Yell's valuation is directly influenced by its high leverage, affecting the Weighted Average
Cost of Capital (WACC). The high leverage increases the cost of debt, impacting the
weighted average cost of capital (WACC). However, the interest tax shield partially offsets
this. Key considerations are as below:
1. Cost of Debt:
o The senior term loans and high-yield bonds carry interest rates ranging from
LIBOR + 2.5% to 10.75%. Assuming a LIBOR of 5.4%, the blended cost of
debt is approximately 8%.
o Interest payments are tax-deductible, providing an interest tax shield, which
reduces the effective cost of debt.
2. Leverage Impact:
 o With £1.45 billion in debt financing, the high debt-to-equity ratio increases the
risk of financial distress but enhances equity returns if the business performs
as expected.
3. Impact on Valuation:
o The high leverage reduces the equity component in WACC, decreasing it
overall.
o However, the risk premium for equity holders increases due to the financial
risk, partially offsetting the benefit of lower WACC.

The projected cash flows must adequately cover interest expenses to maintain financial
stability. High leverage magnifies returns in favourable conditions but increases risk in
downturns.

Question 4: How does the cross-border nature of the Yell deal affect the valuation of the
firm?
1. Currency Risks:
o Revenues from Yellow Book (U.S.) are in USD, while BT Yellow Pages
(U.K.) revenues are in GBP. Currency fluctuations impact consolidated cash
flows and valuation.
2. Taxation:
o The U.K. and U.S. have different corporate tax rates (30% and 35%,
respectively), affecting net cash flows and value attribution to each unit.
3. Market Dynamics:
o Differences in market growth, competitive landscape, and regulation between
the U.K. and U.S. necessitate separate valuation approaches for each entity.
4. Operational Complexity:
o Managing two geographically and operationally distinct businesses adds
integration challenges, which may reduce synergy realization.

Question 5: How much is Yell worth? How much would you bid?
Hint: Value of Yell ~ £2.3 billion, bid should not exceed ~ £2.1 billion.
Using the Excel file and provided data, I will calculate the valuation based on the discounted
cash flow (DCF) method and consider sensitivity analysis. I will analyze the debt structure
and cash flow projections before finalizing the valuation. Allow me a moment to complete
the detailed calculations.
It appears there were issues reading the sheet names from the Excel file. This may be due to
formatting errors or unsupported specifications within the file. Let me attempt to load specific
sheets or repair the file structure to access the data necessary for the analysis.
seems to be unreadable or corrupted, as no sheets could be successfully loaded. Please
recheck the file or re-upload a clean version. Alternatively, let me know if I should focus on
analyzing the data from the PDF or reconstruct the necessary calculations manually based on
the provided hints.