If You Like Dex, You Might Like Yellow
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Dex Media (NASDAQ: DXM) is a textbook situation of a compressed capitalization structure since the equity represents only 8% of the Tangible Enterprise Value. They company has gotten a lot of attention recently, and they should have.
Kyle Bass Loves Dex Media
Kyle Bass of Hayman Capital brought Dex Media to the forefront at the Ira Sohn Conference last week. When he references two companies (below), what he means is the pre-merger Supermedia and Dex One. They merged to form a combined Dex Media.
Although the total debt for the two companies is about $3.2 billion, Mr. Bass said, he said he expects that to drop to $1.5 billion in three years, and that bank debt will likely get refinanced in the next year.
George Schultze Loves Dex Media
George Schultze, the author of The Art of Vulture Investing: Adventures in Distressed Securities Management as well as the managing member of a multi-million dollar investment firm that specializes in distressed securities had this to say over at Forbes:
Based on today’s approximate $16.00 per share price for DXM, the market is valuing the company’s equity at just under $275 MM. Add to that figure $3.4 BN face amount of debt and then deduct $490 MM in cash and tax assets it owns to get an adjusted total enterprise value of $3.2 BN. This compares very favorably, at only 3.3x TEV/EBITDA, with the company’s last quarter’s annualized run rate of $960 MM in EBITDA.
So, this is not news to me. I've covered this story for more than a year now and at present only own the two companies mentioned in this article. I've covered Dex Media extensively over the last year here, here, here, here, here, here, here, here, here, here, and here. I love being an owner of the equity at these prices. All I am saying is that if you like Dex Media, you might like Yellow Media.
Yellow Media Is Cheaper, Kind Of
I've covered Yellow Media (TSX: Y) here, here, and I tried my best to call a shareholder vote to replace management. In fact, I am personally willing to take on the role as CEO of Yellow Media. The overwhelming issue with Yellow Media as I see it is that the company not only needs a leader who can make decisions that maximize cash flows, but also this leader needs to be able to effectively communicate the value that the company brings both to small businesses as well as to debt and equity investors. What I am saying is, "Where is the guidance?"
Comparing Yellow Media (NASDAQOTH: YLWDF) to Shultze's remarks on Dex Media's valuation leads to some interesting conclusions. The capitalization structure is $724M of net debt and $340M of equity. The run rate ebitda is $462M. The TEV/EBITDA valuation for Yellow Media is 2.3x. If Kyle Bass is right about Dex Media being able to refinance, well that would suggest that Yellow Media can refinance since it carries less than half as much debt per EBITDA dollar. Yellow Media could easily save a lot of money by refinancing at a lower rate. If Yellow Media traded at Dex Media's valuation, that would be $23.80/share. That's 138% higher than what you can buy it for today. That would value the warrants at around $9.53, around 252% upside there.
In the figure below, I am sharing a table that I am using to allocate my personal portfolio. The X-Axis is my worst case scenario estimate for how long it would take the security to be debt free using my stabilized cash flow to pay down face value debt. The Y-Axis is the relative leverage free cash flow yield to the price of the equity. The cash flow is what I expect to see the company produce when digital revenue growth offsets print declines.
- If George Schultze thinks Dex Media is cheap at 3.3x, then he probably thinks Yellow Media is even cheaper at 2.3x. Perhaps this is why he asked about industry consolidation on Dex Media's last conference call.
- Historically Dex Media management is more shareholder friendly than Yellow Media Management. The CBCA for Yellow Media was extremely dilutive whereas the dual Chapter 11's for Dex Media were not dilutive.
- Dex Media is roughly double the size of Yellow Media. Investors prefer larger companies to smaller companies.
- Yellow Media warrants are comparable to Dex Media stock. A key difference is the nature of the security. The warrants are forced to participate in the upside of the TEV for Yellow Media whereas the Dex Media stock does not need to participate in the upside of Dex Media as the debt gradually makes its way back up to par. Also, it looks like the warrants are cheaper and have less adjusted debt.
- From point 4 it can be deduced that Dex Media stock effectively trades like a cheap option on the future of the company.
- Yellow Media Stock is arguably the best return on risk in the investable universe of securities that I can find today. That said, I am a warrant man myself.
Don't let the fools fool You
Never underestimate the predictability of stupidity. The fact is that the investing public has turned its back on the directories business. Shame on them. That said, because they did this, companies like Yellow Media were forced to default on their equity obligations whereas companies with better management like Dex Media were able to navigate the turbulent waters and preserve equity owner cash flows. Yellow Media stock is probably better than most of what you have in your portfolio on a risk adjusted basis. But, if you're like me, you're going to take what the foolish market is going to give you --- and load up on the options. Today these options include Dex Media stock and Yellow Media warrants. The difference in capitalization structures favors the latter but the former benefits from proven management, size, a monster short position as of last calculation, and the public attention of billionaire investors.
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Glen Bradford and his clients own Yellow Media, Dex Media, and their options and warrants. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!