Yell braves the IPO market blues with Europe's largest float so far this year

Yellow Pages business plans to raise £750m to help finance acquisitions

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Despite rocky stock market conditions, the Yellow Pages business Yell has finally confirmed its plans to float on the stock market over the summer.

The company, which is hoping to raise about £750m through a share offer to institutional investors, is gunning for a £3.5bn to £4bn valuation, including debt – making it the biggest float of the year so far.

The move, which will allow the directories business to pay off some of its debt as well as give it extra flexibility for making acquisitions, is expected to see shares in Yell start trading in London by the end of July.

But given the sheer size of the company, combined with what remain particularly volatile market conditions, analysts remain sceptical over whether such a hefty IPO will make it.

Last week, Punch Taverns was forced to pull its plans to float on the London market due to lack of investor support. Earlier this week, it announced the float was back on, albeit at a reduced price.

But if John Condron, Yell's chief executive, is even slightly concerned about the volatile market conditions, he's certainly not showing it.

"I'm confident about the business story. Institutions take these things on their merits and I think when we go out, with what is a very strong equity story, the institutions will respond very positively. I think this [flotation] might be the one they [the institutions] have been waiting for," he says.

Whether he is underestimating institutional investors' willingness to snap up shares in his business, given that they will basically be bailing out venture capital firms, is another matter.

A consortium, comprising the venture capital firms Apax and Hicks, Muse, Tate & Furst, bought Yell from BT last summer for just over £2bn.

A £4bn valuation will see Yell's owners book a tidy paper profit although a secondary offering of shares is also planned which will see them sell some of their stock in the float.

The company, which is expected to start life on the London Stock Exchange with just over £1bn of debt, could also eventually be listed in the US.

Nevertheless, investors may well be swayed by the main arguments Yell is putting forward for buying into its business – firstly its growth prospects and secondly the case that it is resilient to recessionary pressures.

The Kelsey Group, a research house, is forecasting the global Yellow Pages industry to grow to about $29.5bn by 2006 from about $25bn last year.

In particular, the size of the independent directories market in the US, where Yell operates, is forecast to grow to $5.4bn in 2006 from about $1.7bn last year.

Then there is the claim that Yell is resilient to recession, as evidenced by the fact that between 1999 and 2002, Yell's UK operation witnessed a compound annual growth rate of about 6.7 per cent.

In the UK, the company owns Yellow Pages, business pages as well as the internet site Yell.com and the directories phone service Talking Pages.

"We [Yellow Pages] are always the last thing that people cut down or cut off [when advertising]," Mr Condron says. "They [small and medium-sized firms] know we are the most cost-effective deliverer of business leads in the market today and they trust us."

Not to mention Yell's capacity to generate cash. The firm reported cash generation of £182.5m in the year ended March 2002, up 7 per cent on the year before.

In the year ended 31 March, Yell reported a pre-tax loss of £12.8m after accounting for charges in connection with its sale from BT. On an underlying, or Ebitda basis, profits were £245.5m, up 5 per cent, on sales of £865.4m, up 11.8 per cent. About 95 per cent of revenues came from selling advertising.

But Mr Condron has ambitions to grow the business which are likely to see Yell snap up more independent directories businesses in the US as well as operations in Europe.

"That's one of the reasons we wanted to come to market as soon as possible – to take advantage of consolidation opportunities," he says.

Yell, which already owns the biggest independent directories publisher Yellow Book in the US, bought McLeod, the second-biggest, for about $600m last month.

Together, those two businesses represented about 42 per cent of the independent market in the US, in terms of revenue, last year with some 532 editions published.

More purchases of independent publishers are on the cards in the US while the firm will steer clear of telecoms-owned businesses including Qwest Communications' directories which are currently on the chopping block.

In Europe, the obvious targets seem to be Germany and France, mainly because the telecoms businesses there, which either control directories or have an interest in them, need to raise cash to cut debt.

"In Europe, the position of all non-core assets is being re-examined by the telcos. They've all got serious debt issues. I think BT's decision to sell the Yellow Pages business gave other telcos in Europe a lot to think about," Mr Condron says.

The UK telecoms giant was forced to sell Yell early last year to its current venture capital owners in a bid to tackle what was then a debt pile of about £30bn.

A move on the German market may be on the cards although it would see Yell having to buy up about 13 or so independent publishers.

Deutsche Telekom, which owns the Yellow Pages or Gelbe Seiten brand name and which earns a royalty for its use, is not yet thought willing to sell. Given it is battling to cut a €67bn debt pile, however, it may change its mind.

Another option would be Spain's Yellow Pages business, or the Paginas Amarillas, owned by TPI. TPI, which is quoted in Madrid, is controlled by Spain's Telfonica.

Then there is France's Yellow Pages business, Les Pages Jaunes, although that is not expected to come on the chopping block anytime soon since it is seen as a core asset by its owner Wanadoo.

Wanadoo, however, is 73 per cent owned by France Telecom, which like its German rival, is feeling the strain of multibillion euro debt mountain.

For the next few months, though, Yell will have its hands full convincing nervous investors that its shares are worth a punt and market sentiment alone is likely to make that harder than it thinks.