1x Yellow Pages = 3.2x Trade Me

March 27, 2007

The big business news this week is the sale of Telecom’s Yellow Pages directories business for $2.24 billion.

That’s a big number!

Some simple maths: 1x Yellow Pages = 3.2x Trade Me.

The buyers are a consortium of CCMP Capital (a private equity firm) and the investment arm of the Ontario Teachers Pension Plan.

The multiples involved are not outrageous. According to ValueCruncher their earnings last year were $250m and are expected to be $300m this year. So the sale price is just under 9x current earnings and 6.4x projected earnings. The equivalent numbers for Trade Me at the time of the sale to Fairfax were 27x current earnings and 15.5x projected earnings.

People have been critical of the sale. According to Telecom they are getting out now because they believe the future of directories is online. I think that’s right. The question is whether that’s online with Yellow Pages or with Google. In either case it doesn’t say much for Telecom’s confidence in their own ability to convert online opportunities (Ferrit? YahooXtra?)

I think Yellow Pages itself is now in a strong position. It’s their game to lose. They have a very strong brand which is very well known and well trusted. And they have an existing billing relationship with more-or-less every business in the country, all of whom expect to pay to appear in the directory (and presumably see some return which is in proportion to that cost?)

They also have a website which is rubbish. They could easily make it 10x better. Applying some of the improvements recently made to the White Pages site would be a good start.

If they get this right it will be pretty difficult for anybody (even a Google) to displace them. And it will allow the teachers of Ontario to be that much more comfortable in their retirement.

It will be interesting to watch and see what happens.

What do you think?