DBRS Comments on Yellow Media’s Sale of Trader, Digital Transition Risk

DBRS notes that Yellow Media Inc. (Yellow Media or the Company) has today announced that the sale of the automotive assets of Trader Corporation (Trader) to Apax Partners for proceeds of $745 million has received regulatory approval under the Investment Canada Act. While subject to customary sale conditions, the Company, after a longer-than-expected regulatory approval process, now expects the sale of Trader to close before the end of July 2011. Previously, the expectation was that the sale would close in June 2011.

DBRS notes that the Trader sale is expected to accelerate the Company’s de-leveraging efforts. The decision to sell Trader remains a critical component in achieving improved leverage – to around 2.0 times debt-to-EBITDA from 2.74 times currently. As stated in our March 25, 2011, press release, DBRS believes that a stronger financial profile remains prudent given the uncertainty that the Company’s business risk profile faces with its multi-year transition from print to digital.

Despite Yellow Media’s leading position in the directories business, its principal segment following the sale of Trader, DBRS notes that this division continues to face significant risks as it transforms from a print-placement and listing organization into an online/digital media and marketing service provider.

While DBRS notes that the Company has achieved reasonable results through the early stages of this transition (as of Q1 2011, more than 25% of Directories revenue is digital) including relatively steady normalized EBITDA and cash flow from operations, DBRS is increasingly concerned (and will continue to monitor) the potential for weakening in Yellow Media’s future business risk profile as the digital transition continues. As such, as the digital component becomes an ever-larger portion of the Directories segment’s business profile, more meaningful evidence that additional challenges are being dealt with successfully will be required in order to maintain the present ratings.

DBRS currently rates Yellow Media at BBB (high), R-1 (low), BBB and Pfd-3 (high), all with Stable trends. See our press release dated March 25, 2011, for more details on the sale of Trader.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating the Newspaper and Magazine Publishing Industry, which can be found on our website under Methodologies.