Description

Eniro AB (ticker ENRO SS) is a good business trading at a very reasonable price. In this case you can put a meaningful amount of capital to work, and sleep at night knowing that you have downside protection because the stock is cheap, the business is stable and healthy, and management is returning excess capital to shareholders. Also, this is an opportunity to take advantage of a weak European stock market.

Eniro is a 2000 spin off of Telia, and the publisher of telephone directories in the Nordic region. The Company’s primary asset is the Gula Sidorna (Yellow Pages of Sweden) although there are also operations in Denmark, Finland, Poland, and Germany. Most of the company’s EBITDA is generated in Sweden, where Eniro has 75% market share, market dominance and pricing power. Also, the company has an internet directory business which is cash generative and strategically valuable in terms of creating a moat around the phone directories. (For more details about the business refer to www.eniro.com and specifically the Presentation Q4 2002 under the financial information site at http://www.eniro.com/upload/Events/Final%20Q4%20webb%202002.pdf)

Regarding valuation, ENRO trades at 53 SEK per share and will earn about 6.2 SEK of cash earnings 2004, resulting in a price/cash earnings multiple of 8.5x. (NB: the exchange rate for SEK is 8.37 SEK/USD). On an EV/EBITDA basis, the company trades for 7.4x EV/EBITDA. The company has net debt of only 1.83B SEK and a market capitalization of 9.3B SEK (equivalent to USD$1.115B). EBITDA next year should be approximately 1.5B SEK. Maintenance cap ex runs around 100MM SEK, and free cash flow runs around 900MM-1B SEK per year. Cash flow is increasing 5-10% per year as the company expands margins in the core Swedish operation and in other markets.

At 7.4x EBITDA, Eniro trades at the low end of the comparable set. In Europe, the Italian directory Seat trades at 11x EBITDA & 25x P/E. TPI (Spanish directory) trades at 8x EBITDA & 14.5x EPS (yet has a controlling shareholder which should justify it trading at a discount). These two are the best comps we have. Other Euro directories VNU trades at 8x EBITDA & Wanadoo trades at 20x EBITDA though these are not pureplays and have significant online businesses.

The European market has had a good deal of M&A activity in the yellow pages space. From 2001 onwards, out of 16 Euro phone directory M&A transactions, the average M&A multiple was 11.1x EBITDA. 3i/Veronis Suhler are active and in November 2002 purchased Telemedia in Holland for 10.5x EBITDA and an EV of 570MM Euros. Texas Pacific Group purchased Telenor Media (Norway) for 16.4x EBITDA in September 2001 (722MM Euros). M&A activity in the US also underscores Eniro’s fair pricing. QuestDex was acquired at 7.4x EBITDA (but EBITDA margins were north of 60%, compared to only 48% in Eniro’s core Swedish operation). BCE was acquired at 8.7x EBITDA, and Sprint’s directory business was acquired for 8.6x EBITDA. (For a good discussion of US M&A activity in the phone directory business, see tbzeej825’s comments on the RHD post). While I do not think Eniro will be acquired by a buyout group -- because it has an unleveraged capital structure and trades in line with other valuations -- I do think the company's private market pricing provides good downside protection.

Eniro does have some history as a takeover target. In early 2001, the stock ran up above 120 SEK with a takeover bid from Seat, the Italian directories publisher. This was an all stock deal that was rejected by shareholders. Had Eniro shareholders accepted the bid, their Seat stock would be worth over 65 today. Though there is nothing to indicate they are currently interested in making a bid, I believe it is possible that Seat returns as a suitor.

One of the main reasons Eniro trades at the low end of the comparable set is that shortly after the spinoff from Telia, Eniro made an ill-fated acquisition of a German directories business called Windhager. Windhager caused significant losses and demonstrated that management did not know what they were doing in the M&A game outside their core markets. In Q4 2002, after pressure from shareholders and an analysis which showed the business might never turnaround, the company announced plans to close down Windhager. While this Windhager failure aggravated a number of shareholders – many in Sweden have given up hope – management appears to have learned a lesson and recently announced they were not going to make acquisitions outside their core markets. On the positive side, the Windhager failure is a continuous reminder to management and the board not to do iffy, imperialistic acquisitions.

Catalyst

This is a soft catalyst situation. A few weeks ago, the company announced it will be redeeming 700MM SEK later this summer at 80 SEK/share and doubling its dividend to 1.40 SEK per share. Management is distressed with their stock price and has publicly stated they will not be doing any acquisitions outside their core markets and plan to return excess capital to shareholders. (They would return more capital but wish to have capacity to acquire a strategic asset in their core markets if it becomes available.) The redemption must be approved by shareholders at the March 31, 2003 Annual General Meeting. I expect it will be approved. Management has indicated they can and probably will do further stock redemptions as the cash builds.

Also, over 70% of the company's shareholders are outside of Sweden (with 35% in the US and 23% in the UK). There are no controlling shareholders, and management has said they will sell the business if they get a fair price for shareholders. Ultimately, I expect this business to trade at a premium value.