Provide a British Pound Valuation for the Yellow Page businesses of British Telecom assuming you are a banker for Hicks, Muse. Utilize the information from the Valuing a Cross-Border LBO: Bidding on the Yell Group case study.
Assumptions for Yellow Pages US:
All information necessary are found in Exhibit 7 and the text on page 6.
- Calculating Free Cash Flow using the CCF methodology.
- Utilize Exhibits 10 & 11
to calculate an appropriate Return on Assets for the British division and then adjust accordingly using the risk-free rates of the UK and US to get the ROA for the US Yellow Pages. - As discussed in the case use a growth rate of 2% and 5% for the UK and US businesses respectively.
- Utilize the above information to calculate a valuation for each business (dont forget to calculate a terminal value for the businesses for year 2007).
- Convert the US valuation to British Pound using the spot exchange rate give
n in the case.
New Market Launches Hoping to capture auch of the predicted markot ahare gains, Yellow Book's growth plans were amblticus. Although the A pax/Hicks Muse team was confident that some organic growth could be achieved in the nent fow years, they thought that an iggressive strategy of new product launches would have to complement organic growth in order to achleve management projections on the revenue side. As a result, thiy built several new launches each year into their forecasts (see Exhibit 7). Management expected EBITDA margins to increase as the portfolio matured. In their experience very low margins wefe achieved in the first year of uperations for new launches, while margins could improve significantly and almoet match margins on organic sales right from the second year of operations. Aecordingly, the sponsors thousht it important to segregate organic revenues from new launch reverues and only apply an EBTTDA mazgin to onganie sales while mparately adding in the impact of new Launches in order to roll the two very different types of markcts together. The sponsors believed that a 17% EBITDA margin on nganic sales was a more realiatic target for 2002 , improwing at a 2% increase per year as busizess went up until the 25% targot rute was hit in 2005 and maintained thereaftec. Since the risk of a cold launch was perceived to be two high in a new market given a strong incumbent publisher or lack of Yellow Bock brand awareness, management had opted in the past to give away advertising for one year for froe. This apponach involved identifying the advertisers in the incumbents books and proyiding them with a similar advertisement at no cont in the fint year. This required an investment in direct and sales coetis ctarst-year discounts, free eopier, promotions, and costs of prototypingl of around $4 million in the first year of each linench. This initial-year investment was particularly significant when compared with first-year avezage revenues of \$8.1 million for each launch. Moreover, there was slgnifleant uncertainty around these revenues figures (tho sponsots believed they could range batween 45 millipn and \$11 millian), so Apax/Hicks Muse folt it necessary to segrogate out the crganic fewimies from the revenues associated with now launches, all of which management hed rolled up into a-single top-line forecast. This approach also launcher, which ould rot be dorlved as relinbly from applying EEITDA margins to new launch revenues as could EBITDA from organic reveriugs Working Capital It was the nom in the.US and the U.K to take a very smail up-front deposit and to bill the custamer monthly crer thic 12 monthos post publication. As a rulo of thumb it would sake 180 days (un average) to recelve payment from customers. X$34 milion increase in working capital in 2001 hed been unusually low in manayement's view-an anomaly stemming from the early stege of the businetic-) On the contrary, payablus turned over in approximately one meoth. OHer U.K. Businesses In addition to its eore directory busirnass, BT Yellon Pagen uwhed and opurated four relatively small divisings in which the company had invested C14 million in 20101. These divisions were: - Buciness Pages: six directory oditions zimed at the business-to-business market. - Taiking Pagar a 24-liour, telephone Gaked, operatir-assisted directory secvioe. Eodritsition Valuing a Cross-liander 1BCh Bidding au the Yell Graup Exhibit 11 Country-specifuc Intormation about lnterost Rates, Currency, and Taxes New Market Launches Hoping to capture auch of the predicted markot ahare gains, Yellow Book's growth plans were amblticus. Although the A pax/Hicks Muse team was confident that some organic growth could be achieved in the nent fow years, they thought that an iggressive strategy of new product launches would have to complement organic growth in order to achleve management projections on the revenue side. As a result, thiy built several new launches each year into their forecasts (see Exhibit 7). Management expected EBITDA margins to increase as the portfolio matured. In their experience very low margins wefe achieved in the first year of uperations for new launches, while margins could improve significantly and almoet match margins on organic sales right from the second year of operations. Aecordingly, the sponsors thousht it important to segregate organic revenues from new launch reverues and only apply an EBTTDA mazgin to onganie sales while mparately adding in the impact of new Launches in order to roll the two very different types of markcts together. The sponsors believed that a 17% EBITDA margin on nganic sales was a more realiatic target for 2002 , improwing at a 2% increase per year as busizess went up until the 25% targot rute was hit in 2005 and maintained thereaftec. Since the risk of a cold launch was perceived to be two high in a new market given a strong incumbent publisher or lack of Yellow Bock brand awareness, management had opted in the past to give away advertising for one year for froe. This apponach involved identifying the advertisers in the incumbents books and proyiding them with a similar advertisement at no cont in the fint year. This required an investment in direct and sales coetis ctarst-year discounts, free eopier, promotions, and costs of prototypingl of around $4 million in the first year of each linench. This initial-year investment was particularly significant when compared with first-year avezage revenues of \$8.1 million for each launch. Moreover, there was slgnifleant uncertainty around these revenues figures (tho sponsots believed they could range batween 45 millipn and \$11 millian), so Apax/Hicks Muse folt it necessary to segrogate out the crganic fewimies from the revenues associated with now launches, all of which management hed rolled up into a-single top-line forecast. This approach also launcher, which ould rot be dorlved as relinbly from applying EEITDA margins to new launch revenues as could EBITDA from organic reveriugs Working Capital It was the nom in the.US and the U.K to take a very smail up-front deposit and to bill the custamer monthly crer thic 12 monthos post publication. As a rulo of thumb it would sake 180 days (un average) to recelve payment from customers. X$34 milion increase in working capital in 2001 hed been unusually low in manayement's view-an anomaly stemming from the early stege of the businetic-) On the contrary, payablus turned over in approximately one meoth. OHer U.K. Businesses In addition to its eore directory busirnass, BT Yellon Pagen uwhed and opurated four relatively small divisings in which the company had invested C14 million in 20101. These divisions were: - Buciness Pages: six directory oditions zimed at the business-to-business market. - Taiking Pagar a 24-liour, telephone Gaked, operatir-assisted directory secvioe. Eodritsition Valuing a Cross-liander 1BCh Bidding au the Yell Graup Exhibit 11 Country-specifuc Intormation about lnterost Rates, Currency, and Taxes
