Description

• PAJ FP publishes directories (general public/business), provide online services and aids in direct marketing
• Online services include website creation, hosting and business ad services
• PAJ FP sells business and consumer databases for multi-channel direct marketing campaigns using mail, telephone, SMS or emails
• Publication of directories includes listings of private and business telephone subs for each admin department
• Localization services include route planning services and databases of photographs of major cities
• PAJ FP operates in France, Spain, Belgium and Luxembourg 

• KKR/Goldman Sachs purchased a controlling stake in PAJ FP from France Telecom (FTE FP) in mid-2006
• KKR/Goldman Sachs re-levered PAJ FP with a massive debtload and paid themselves a ‘special’ one-time dividend of €9/share in 2007 – assuming FCF would finance 100% dividend policy and the massive debtload – essentially a public LBO
• PAJ FP sold a minority stake in its PagesJaunes Petites Announces division (online classified ads) to M6 Metropole Television (€2.1B public broadcast company) in 2007
• Bottom Line: PAJ FP has no margin of safety as there is no room to de-leverage given the 100% dividend policy and relies on the sponsor’s ability to refinance the debtload – unlikely in a recession scenario, or in the face of mounting competition from online players

• Negative Shareholder Equity: Pre-special dividend, PAJ FP had €407mm shareholders’ equity. Post-dividend – equity turned negative to -€2.7B. Given PAJ FP’s dividend policy, expect shareholders’ equity to continue to trend lower until debt is paid off – either refinance, raise equity or sell assets
• PAJ FP’s debt is 82% hedged, but the swap and collar hedges will lift in Dec. 2011
• Organic Growth: Other global yellow pages companies in US/UK face slowing organic revenue growth – 1-3% at best vs. 5% for PAJ FP, though all face similar headwinds: economic slowdown, limited visibility, secular challenges, Internet competition and high financial leverage
• PAJ FP is reducing its prices by 20% for selected areas in France for ads in its print directories
• PAJ FP’s Internet business has a ~23% 5 year CAGR and is ~32% of total revenues; PAJ FP expects Internet to be >40% of revenues in 2008
• Seat Pagine Gialle (PG IM) issued a profit warning yesterday, blaming the increasing prominence of Internet and greater competition from GOOG. In response, PAJ FP takes the approach France is different
• To facilitate its transformation to an Internet company, PAJ FP is lowering the directory prices in large cities (Paris, Lyon and Marseille) and by raising Internet prices

Catalysts

• Recession/Falling ARPA: Despite growing the number of advertisers, ARPU is falling. In a recession/further economic slowdown in Europe – this trend exacerbates. PAJ FP has responded by increasing Internet ad prices while decreasing the number of print ads – lowering print ARPU/revenues
• Dividend Cut: PAJ FP cannot continue paying out 100% FCF as dividends in the current economic environment (€303mm in dividends in ’07 vs. €267mm ’07 FCF) – in all likelihood, the dividend will be cut. However, if the credit/economic environment gets better – its possible they can avoid a cut
• Earnings Downgrades: I would expect Analysts have yet to similarly downgrade PagesJaunes. PagesJaunes earnings expectations and seem to be accepting the company’s word at hand. This may lead to future surprise earnings downgrades, just as happened in the US and UK
• Debt Refinancing?: PE sponsors did not anticipate a credit crunch when they structured its credit hedges in 2006 (expiring 2011 with debt due in late 2013). If current conditions persist, its highly unlikely PAJ FP can refinance the debt. It’s also likely the current dividend will need to be cut in order to pay down debt in the event of covenant violations
• Investors Day (4/30/08): PAJ FP is expected to highlight its new pricing strategy and focus on its Internet initiatives. Inevitably, PAJ FP will have to address economic slowdown issues as well and its effect on business
• France Telecom Non-Compete: FTE FP sold its 54% controlling stake to KKR/Goldman Sachs in mid-2006 for €13/sh.  FTE FP’s non-compete clause ends in 2010. While its unclear FTE FP will re-enter the business, it’s possible especially if PAJ FP is reeling. Another possibility is FTE FP funding a startup competitor

• PAJ FP is trading at ~10x ’08 EBITDA – significantly higher than its comps at ~7.5x (YELL LN, IAR, RHD, ENRO SS, PG IM)
• PAJ FP pays out 100% of FCF as dividends vs. industry average of ~37%
• Leverage is ~4x EBITDA vs. industry average ~5x
• PAJ FP has fallen ~21% over the past year vs. industry average >70% decline
• Newspaper stocks are trading ~6-7x EBITDA – on a comparative basis, PAJ FP would trade ~€4-6/share

Catalyst