Verizon YellowPages / Idearc, Inc. and Sirius XM Follow Similar Paths, Dark Before Dawn
Verizonís YellowPages Division Called Idearc Media In Voluntary Bankruptcy And Following Same Path as Sirius XM
Idearc, Inc., (Pink Sheets: IDARQ), the official YellowPages division of Verizon Communications was spun off from Verizon in 2006, is in a situation similar to Sirius XM (Nasdaq: SIRI) in that it has a customer base in the millions, has great cash flow, and has potential for additional customers and revenue growth at minimal marginal cost. (Sirius has about 2.4 billion dollars per year in gross income; Idearc has about 2.973 billion dollars per year.) Sirius plummeted to as low as 5 cents because of a bankruptcy filing but quickly ran back up to .63 cents soon after.
Idearc filed for voluntary chapter 11 bankruptcy in order to renegotiate its debt. Although Idearc was not technically bankrupt with over $500 million cash in the bank and net cash flow of $300 million per year, the weak economy spurred creditors into lowering the outstanding debt from $9 billion down to $3 billion along with more flexible payment terms. One of the terms is that Idearc give anything over $150 million in their bank account to creditors in order to pay down the $3 billion in debt. Essentially, Idearc will always have $150 million in the bank and anything over that will be taken out to pay down debt. Idearcís 3 billion dollar debt has a note rate of 12%, the annual debt service is $360 million dollars, about 12.1% of 2008 gross annual revenue. The creditors/lenders have already approved the reduction in debt. The company is now waiting for approval from its board and the bankruptcy judge. According to the new deal, Idearc must give the creditors $250 million from its cash reserves as a sign of good faith. This will put Idearcís cash position at approximately $250 million after the deal is completed.
Conservative financial analysis indicates that Idearc can easily pay off its lower debt while expanding revenue from its internet-based yellow pages (SuperPages.com) and printed Verizon Yellow Pages directories for Verizon Communications, Inc. (NYSE: VZ). According to DomainTools.com, Idearc owns 1,472 domains / websites - like LocalSearch.com, SwitchBoard.com and SuperPages.com- that have substantially higher profit margins than its building-and-machinery printing operations. We value these domains / websites / businesses at $200 million. ($1.33/share). SuperPages.com alone is ranked in the top 20 most trafficked web sites on the planet while being in the top 500 most popular sites on the planet.
SwitchBoard.com is in the top 3,000, as well as LocalSearch.com being in the top 20,000, according to ComScore and Alexa.com.
Similar to real estate, a fair method to valuate domain properties is to look at past comparables. According to www.MostExpensiveDomainNames.com and press releases found online, YellowPages.com with 5 million monthly unique users was acquired by AT&T in 2006 for $120 million. In 2007, SwitchBoard.com and other directory assets were acquired by Idearc, Inc. for $225 million. LocalSearch.com was acquired by Idearc, Inc. for $1.8 million. SuperPages.com has far more users than YellowPages.com which puts its value between $150 million to $250 million. In total, the online assets owned by Idearc, inc. (Pink Sheets: IDARQ) is worth anywhere from $200 million to $500 million on a conservative basis. SuperPages.com alone generates $300 million. 10x to 20x times revenue gives a $3 billion to $6 billion value on just SuperPages.com alone.
According to Idearcís 2008 Performance Summary Form 8-K SEC filing, located at:
Idearcís 2008 annual income was 2.973 billion dollars. Its adjusted EBITDA was 1.272 billion dollars. Its adjusted net income was 353 million dollars. With 150 million shares outstanding, thatís $2.35/share.
Its 52 week high was just over $20/share, valuing the company at about 8.5 times earnings. The stock is currently trading around .05/share. Our estimate is that after management reorganizes the business, its printing, distribution and cost-of-sales should be no more than 60% of gross revenue, leaving 1.189 billion dollars in EBITDA, and net income of 829 million dollars; $5.52/share. Once the economy stabilizes, and media companies are valued at 8 times earnings, the share price could be close to $40. We expect the stock to move to $1 within a few months and close to $5 within a year, as the web properties continue to grow, and printing costs contained.
Common shares of a company in bankruptcy (restructuring) only become worthless when there are no assets left to support the value of the stock and there is imminent danger that the company cannot continue as a going concern without the infusion of more capital. For example, American International Group (NYSE: AIG) is in imminent danger because they have limited equity remaining, a huge debt load and worst of all, they continually need more capital to survive. If the U.S. Government did not back them up, they would have collapsed. However, with Idearc Mediaís $500 million cash in the bank and $300+ million per year in net revenue, they technically are not bankrupt. They have plenty of cash, are cash flow positive, own several high-traffic and valuable advertising websites and they are currently still operating and thriving. There is plenty of equity to back up the common shares. Even if the creditors were to dilute Idearcís shares in compensation for the $6 billion in debt that was renegotiated, there is still plenty of room to make a big profit if buying IDARQ in the .05 cent to .49 cent range which represents a $7.5 million to $75 million market valuation.
Idearc Media will come out of bankruptcy a much stronger company, and its common shares will eventually trade back on the Nasdaq. The hidden, unrealized value lies in their websites and domains. The stock trading near five cents represents a $7.5 million market cap. This is highly undervalued. IDARQ should be trading in the $1 range which represents $150 million in market valuation; about half is value from their dot com operations. SuperPages.com is the #1 Yellow Pages site in the US with nearly 40 million monthly users, according to ComScore.
Verizon is one of the biggest telecom companies in the United States. Their YellowPages division will not go bankrupt and they will not tarnish their image and ruin employee stock option plans and company morale while they have a fully operating business and a very strong online business. Idearc is essentially Verizonís online division which they desperately need to compete with AT&T Interactive (NYSE: T) and YellowPages.com.
IDARQ will be one of the biggest come-back stories of 2010 or
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