Description

RHD, trading at 6.9x 2003 CEPS (which approximates FCF) which is growing at >30%, is an excellent VIC idea because of its compelling story which has not yet been picked up on by sell-side analysts (but will!):

On January 3, 2003 RHD announced the closing of is acquisition of Sprints directory business. RHD is a marketer of yellow pages advertising in some of the most attractive markets in the country and prior to this acquisition RHD had already been serving as the exclusive sales agent for many of Sprint's directories.

This deal is highly accretive to CEPS ($2.42 in 2002 going to $4.48 in 2003) and will create the only publicly traded pure play yellow pages directory business. RHD will be a non-union directory business with an incumbent phone company brand name without the bureaucracy of being buried within a telephone company.

This deal can be thought of as an IPO of an LBO. Cash flows in this business are incredibly stable (US directory advertising revenue has never not grown in the last 10 years) as a result of the fact that no customer represents anywhere near 1% of revenue and they obtain such high ROIs that renewal rates are in excess of 90%. Additionally, RHD commands 80% marketshare. As evidence of investors confidence in the this businesses cash flows, the debt deal was well oversubscribed, priced at better terms for RHD than they had outlined during the announcement of their deal and is currently trading at 110.

The opportunity in this transaction lies not only in the huge growth in CEPS through the acquisition of an entity entirely known to RHD but also as a result of the confidence in their ability to execute this integration with the installation of Peter McDonald, widely agreed to be the best directory operator in the business, as the head of Sprints Directory business. In his previous executive role running Ameritech's directory business, Peter McDonald delivered better organic growth than anyone in the industry growing the top line at 8% and the bottom line at double-digits. Our 2003 CEPS estimates for RHD do NOT include any EBITDA growth or synergies (both of which are expected by the Company).

Catalyst

1.) Integration of the two businesses and realization of CEPS accretion (the reason we focus on CEPS is that this deal was structured as a stock purchase with a Section 338 (h) (10) election to treat the purchase as a purchase of assets for federal income tax purposes--another catalyst once more widely understood)

2.) Wall Street coverage. RHD is not currently covered by any major Wall Street brokers yet Goldman Sachs who is a private equity investor in this deal and several other major firms who did the debt deal are expected to be initiating coverage on this stock in the near future.