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— Backstory —
But other questions are left hanging. How much of its $9.6 billion in debt does R.H. Donnelley, the industry's No. 3 publisher of directories, need to remove from a balance sheet that serves up an enterprise value of only $9.5 billion? Should it steal a page from Idearc Inc., the No. 2 directory publisher, which in a Chapter 11 petition filed March 31 announced plans to vaporize $6 billion?
Capital-structure similarities indicate it should. Idearc's debt, $9.5 billion, also tops its enterprise value, $8.8 billion. So, like R.H. Donnelley, Idearc has a cash hoard worth more than the market values its common stock. (The latter is of the penny variety for both industry also-rans, whereas leading directory publisher AT&T Real Yellow Pages remains safely ensconced inside its Ma Bell parent.) Cut out $6 billion at Idearc and its debt leverage falls to a sustainable 2.9 times trailing Ebitda, from an untenable 7.9 times. The same exercise at R.H. Donnelley reduces leverage to 2.7 times trailing Ebitda, from 7.2 times. That suggests whatever restructuring Idearc has in the works would serve R.H. Donnelley equally well. But will R.H. Donnelley's creditors go for it? This last question is unanswerable -- for now, at least -- because it's not at all certain creditors of Idearc will elect to buy into its restructuring plan. The plan sounds good, to be sure. "A pro forma level of $3 billion of secured bank debt, with a 12% interest rate and a six-year term," to quote from Idearc's restructuring release. "Mandatory amortization will be $60 million for each of the first two years following confirmation and $40 million per year thereafter." The detail is such that even cash flows have been itemized, with Idearc retaining 32.5% and "the balance to be paid as additional amortization on the bank debt." Moreover, much like the Chapter 11 filing by Charter Communications Inc. four days before it, Idearc has put forth a restructuring proposal that claims to have "an agreement in principle with the agent bank and a steering group of its secured lenders on certain critical elements." The agreement Idearc cited, however, may warrant less optimism than the one Charter obtained. "Who's in that steering group?" asks a bankruptcy expert, drawing a comparison with the "ad hoc committee" of Charter noteholders, who committed themselves to investing an additional $3 billion in the company before it even filed for bankruptcy. "Are [Idearc creditors] willing to step up and write another check? You get a lot of credibility doing stuff like that." An Idearc spokesman would not elaborate on the steering group or "on anything pertaining to our restructuring." But details of the group's composition should be forthcoming in the plan of reorganization that, on entering bankruptcy, the Dallas company promised to file within 30 days. Not that there's a dearth of data to process until then. Idearc has already provided the U.S. Bankruptcy Court for the Northern District of Texas with a cash-spending forecast for the 13 weeks beginning April 1. Therein the company has earmarked cash disbursements of $24 million for "building/grounds" and $34 million for "contractor/consulting services." Both line items, if remotely discretionary, appear awfully large for a bankrupt company whose entire payroll for the same 13 weeks totals $105 million. Taxes, meanwhile, are forecast at $167 million for the quarter-year. This, too, seems large next to the full-year income-tax provision of $96 million that Idearc reports in its most recent Form 10-K. Discussions over such discrepancies can polarize the most cohesive of credit committees. Yet those participating in Idearc's restructuring may be distracted by something else as well. It was only 2-1/2 years ago that Verizon Communications Inc. spun off what had been its in-house directories division, loading it up with $9.1 billion in debt. This legacy of its former parent has had Idearc struggling ever since with what even CEO Scott Klein calls "a terminally ill balance sheet." Some creditors may consider the circumstances of Idearc's spinoff so negligent that talks about its reorganization generate more than the usual amount of vitriol. And that alone has many bankruptcy followers hoping that Idearc really is assembling a persuasive steering committee and not, as some suspect, merely floating a balloon. Richard Morgan covers media for The Deal. |
R.H. Donnelley Corp.'s missed interest payment last week offers a definitive answer to that question looming for the past year: Can the Yellow Pages make it? 
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