Industry News
Publisher plans acquisition
Donnelley would more than double, become no. 3
By DAVID RANII, Staff Writer
CARY, NC - October 4, 2005 - R.H. Donnelley, a yellow pages publisher that has grown by acquisitions, is undertaking its biggest deal -- a $4.2 billion purchase of Colorado-based Dex Media.
The deal announced Monday will enable Cary-based Donnelley, which publishes directories in 19 states, to more than double in size by adding phone directories in 14 Western and Midwest states. After the purchase is completed, Donnelley will be the country's No. 3 publisher of yellow pages.
"This transaction has a lot of industrial logic to it ... from both a strategic and an operating perspective," Donnelley CEO Dave Swanson said in a conference call.
Combining the businesses creates economies of scale, lowers the vulnerability to downturns in individual markets and provides added clout in negotiating deals with online portals and search engines, Swanson said. Yellow pages publishers generate much cash but their advertising sales are growing slowly, pushing them to look to the Internet to increase revenue and protect their franchise.
Swanson also said the businesses have complementary strengths, with Dex excelling in developing new online products and marketing while Donnelley is strong in sales and operating expertise. And the markets where they operate are complementary, with "almost no geographic overlaps," he added.
"By combining these strengths, we can be a better company going forward," said George Burnett, president and CEO of Dex.
On the down side, the acquisition will trigger an unspecified number of job cutbacks and will saddle Donnelley with substantial new debt -- raising its total debt to more than $10 billion.
After the acquisition, Donnelley will publish directories with circulation of 73 million in 28 states and will have more than 1,800 sales representatives. The combined company will keep the R.H. Donnelley name and remain headquartered in Cary.
"It's a bold move, but it's a smart move," said Ken Clark, publisher of YP Talk, an online newsletter about the yellow pages industry, based in Holly Springs. Clark is a Donnelley shareholder.
Having more directories will make the company more attractive to national advertisers, Clark said, and Dex's more-advanced online business will enable Donnelley to accelerate its online efforts.
Dex is top in local searches in its markets -- that is, searches for, say, a plumber in Seattle -- and has agreements in place to provide its advertisers' content to Web giants Google and Yahoo. "Our content is being searched every day" on Google and Yahoo, Burnett said.
Dex, which publishes yellow pages and white pages directories for Qwest Communications, is a substantially larger company than Donnelley. Dex has projected that it will generate $1.658 billion in revenue this year, versus $1.04 billion for Donnelley.
Despite the size disparity, there is no question the deal calls for Donnelley to take over the operations of the larger company.
Although Dex's president and CEO, Burnett, will become chairman of the combined company, the top management team led by CEO Dave Swanson will remain intact. That includes Peter McDonald, who will be chief operating officer of the combined company, and Steve Blondy, who will be chief financial officer. "We will round out the management team with the finest people from both organizations," Swanson said.
Donnelley is experienced with acquisitions. It transformed itself from a company that earned commissions by selling ads in yellow pages published by others into a publisher in its own right when it acquired Sprint's yellow pages business for $2.2 billion in 2003. Last year it acquired SBC Communications' yellow pages business in Illinois and northwestern Indiana for $1.4 billion.
Donnelley will pay $12.30 in cash plus nearly one-fourth of a share of its stock, 0.24154 shares, to be exact, for each share of Dex. That values Dex at $4.2 billion, based on Donnelley's share price before the deal's announcement.
It also will give current Dex shareholders a 53 percent ownership stake in the combined company. Donnelley investors will own 47 percent.
The combined company's board of directors will consist of seven members appointed by Donnelley and six appointed by Dex.
Donnelley shares closed Monday at $61.77, down $1.49. Its stock is up nearly 5 percent so far this year. Dex shares closed at $26.82, down 97 cents.
Donnelley also will assume Dex's $5.3 billion in debt as part of the deal. Add Donnelley's $3.1 billion in existing debt plus $2.3 billion that Donnelley is borrowing -- to fund the cash portion of the deal and to repurchase $337 million in preferred shares held by Goldman Sachs -- and Donnelley's total debt will be $10.7 billion after the purchase.
"It changes the risk profile, because they now have $10 billion in debt," said Rachel Matthews, senior analyst with Cardinal Capital Management in Greenwich, Conn., which owns several hundred thousand Donnelley shares.
Still, she said she is giving the company the benefit of the doubt that it will be able to handle the debt based on its past deals.
Jim Gruskin, Donnelley's assistant vice president of finance, said the debt is manageable. "With this acquisition comes a tremendous amount of cash flow that would enable us to service that debt," he said.
Job cuts are anticipated from the deal, but Donnelley's George Bednarz, vice president of corporate planning and information technology, said that it's too early to say what the magnitude of cutbacks might be. "You have to remember the lion's share of our employees are sales reps in markets that don't overlap," he added. "That means no redundancies."
Donnelley has nearly 500 employees in the Triangle, including about 200 at its Cary headquarters. The company moved its headquarters to Cary from New York in 2004, thanks largely to more than $4.3 million in state and local incentives.
YP Talk's Clark said he doesn't think local Donnelley employees should be nervous about job security. "I think the ones that should be most nervous are the middle managers and senior managers at Dex," he said.
The deal, which is subject to shareholder and regulatory approval, is expected to close in the first quarter of next year.
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