If this sequence of events sounds familiar, it is — because Verizon did this when they spun off their Yellow Pages to form Idearc.
It’s a little disappointing to see AT&T likely planning to divest itself of Yellowpages.com and their print directories, because only in January of last year it had seemed possible that they might have toyed with the idea of performing a massive three-way merger of yellow pages companies by acquiring both SuperMedia and Dex One. I’d heard some convincing rumors, noted their increasing partnership agreements, and knew that it made sense for a few of the major YP companies to combine in order to pool resources while reducing costs. There was (and is) still quite a lot of cash flow going on in printed yellow pages books as well as some growth in IYP business, but there have appeared to be too many competitors in the field for a while now. AT&T’s statements appear to corroborate the assessment while also demonstrating that print market continues to shrink compared to online.
Will AT&T find a buyer for their YP business? Considering the direction that traditional media businesses have been going (the ones which are struggling to evolve into equivalent profitability in the online marketplace), it would seem unlikely that they’d find a someone to acquire that unit unless it was a hedge fund looking to break up the parts to sell off individual pieces as a divestment strategy.
What seems more likely would be for AT&T to attempt to spin-off the unit into its own company — and in order for them to do so profitably, they would have to saddle it with some substantial degree of debt load.
This latter possibility is the most concerning of options, because it might create a high chance of failure and associated financial losses for whoever owns its stock and debt instruments. Both SuperMedia and R.H. Donnelley corporations were propelled into Chapter 11 bankruptcy restructuring, citing untenable debt loads as a factor. Since print YP is such a large component of these companies, and since replacing of print with online advertisers typically isn’t a one-to-one exchange in terms of profitability, large amounts of debt load will sand-bag such a company to a degree where they cannot effectively operate and compete. AT&T’s challenge, I believe, will be to offload a sufficient amount of debt to make it a profitable exchange, while convincing regulators and Wall Street that the operation isn’t producing a sabotaged company from the outset.
The resulting scenario could look like a high-stakes game of tossing the hot potato — who will be left holding the bag if the resultant company fails?