RH Donnelley’s Rollup Strategy Comes Undone
The yellow-pages giant blames its “growth-through-acquisition strategy” as it files for bankruptcy protection.
May 29, 2009
The rollup as a strategy has been cast aside by many critics as a doomed enterprise. It’s possible, however, that perception overshadows reality, since when rollups do fail, they do so in spectacular fashion. The latest example comes from RH Donnelley, which filed for Chapter 11 bankruptcy protection, blaming its “growth-through-acquisition strategy” that never anticipated the downturn in the economy and local media markets.
The company has already reached an agreement in principle with the key creditor constituencies that would reduce its roughly $12.37 billion debt load by roughly $6.4 billion. If this agreement stays in place, it would extend RH Donnelley’s debt maturities to 2014 and slash $500 million off of its annual interest expense. The company expects projected cash flow and an anticipated $300 million on the balance sheet will allow it to fund operations without having to secure a debtor-in-possession financing facility.
Through the plan, which still requires court approval, unsecured creditors, holding roughly $6 billion of debt, would receive 100% of the equity in the restructured company and $300 million of newly issued unsecured notes.
Since 2003, RH Donnelley has been active acquirer. It bought Sprint’s Embarq directories business in January of that year, paying $2.23 billion for the assets. A year later, it paid $1.14 billion in cash for AT&T’s directory business in Illinois and Northwest Indiana. Both of these transactions shifted RH Donnelley from a pre-press vendor and sales agent of yellow pages advertising to a dominant publisher in the directories space.
The company’s highest profile deal, and the one that added the most stress to its balance sheet, was its 2006 acquisition of Dex Media, a $9.8 billion acquisition that brought on roughly $5.5 billion of debt. Other deals followed including successive purchases of Local Launch Inc. and Business.com.
However, by 2008, RH Donnelley began to crack under the debt load. The company registered $1.42 billion of Ebitda for the year, a decline of just 2%, but was forced to eliminate 20% of its employees and cut expenses by $100 million in an effort to trim costs. Through exchange offers, RH Donnelley reduced its net debt by $621 million in 2008, although significant maturities beginning in early 2010 forced the company to consider other alternatives.
The acquisitions can’t be considered a total loss, however, as RH Donnelley topped its estimate for over $75 million in cumulative integration savings from the Dex deal.
R.H. Donnelley will remain a public company, a spokesman confirmed, and management will stay on board following the restructuring. A hearing is scheduled for Monday morning.
Lazard is advising the company on the restructuring, while Sidley Austin LLP is providing legal counsel. JPMorgan and Deutsche Bank are serving as the agents for the bond groups.
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