Bain Capital & Mitt Romney’s Involvement with Italy’s Yellow Pages Debacle

by Chris Silver Smith

Bain Capital, Mitt Romney, and Seat Pagine Gialle - Italy Yellow PagesMy attention was drawn to this Bloomberg article today, “Romney Persona Non Grata in Italy for Bain’s Deal Skirting Taxes“, brought to my attention by a Tweet from Greg Sterling.

Let me note upfront that I’m politically a moderate and a non-partisan, so my interest in this article is primarily from the perspective of the business and historical aspects involving the Yellow Pages industry, which I’ve written about from time-to-time.

The article outlines a possible reason why Romney’s trip through Europe didn’t include a stop in Italy, one of the G8 countries: some years back, Bain Capital, Mitt Romney’s company, purchased a major stake in Italy’s Yellow Pages, Seat Pagine Gialle, and then they later resold their portion during the height of the Internet bubble for a very hefty profit, in the process circumventing taxes that could have benefited Italy. Subsequent to the Internet bubble, though, the Italian Yellow Pages declined very sharply in value at the expense of company shareholders (many of whom were possibly Italians) and the devaluation probably negatively impacted the service provided in Italy which could be said to affect virtually all Italians, one way or another.

The article does a fair job at reporting that the sequence of events was legal, but that the process probably leaves a very bad taste in the mouths of Italians due to shared cultural experiences they have. Certainly, if government officials benefit from deals with private industry at the expense of the general populace, there’s basis for ill sentiment.

I’m generally moderate/philosophical about the criticism about companies avoiding taxes through various methods, so long as subterfuge isn’t involved. From my perspective, it’s actually part of the fiduciary duty of executives and directors representing shareholders of companies to install the most advantageous methods possible for increasing and retaining profit revenues, so long as all laws are followed in doing so. It’s possible that there could be ethical considerations involved which go beyond the stated laws, but the necessity of representing the company shareholders advantageously is pretty well the top priority of any corporation. In this respect, it may be that most of Italians’ ire should be directed to their own government and laws, if they had wanted to retain some taxes from the sale of the Seat Pagine Gialle. Perhaps there also should have been some longer-range profit remunerations which would be invoked in the contract after the company was sold off.

But, there’s a big element missing from the Bloomberg article which, when left out, makes it seem borderline biased.

According to the article, Bain Capital bought 61.7% of the Yellow Pages in 1997, and then turned around and sold their portion at a significant profit (around 28x higher price) in 2000. Since Y2K, the company has lost most of its value – roughly 90%. The way the sequence of events is presented makes it seem as though something nefarious and intentional was going on which allowed Bain to profit while leaving shareholders with an empty bag and devalued company.

However, during the Internet Bubble, there were many Yellow Pages companies which were valued up to nose-bleed levels, along with many other companies involved with the Internet, ecommerce, local business data, and technology. For Bain Capital to have done something wrong, I think they’d have to have knowingly purchased Seat at a significantly undervalued price, or knowingly sold it off at irresponsibly high valuation.

At around 1997, a lot of people felt Yellow Pages companies were in a prime position to profit from internet expansion. Print Yellow Pages had held something close to a monopoly upon advertising for local businesses for nearly 100 years, allowing them to pump up advertising costs significantly over time, and to allow them to enjoy excellent revenue growth up until the advent of the internet. As the commercial side of the internet began taking off between 1994 to 1997, there wasn’t any reason to think that the Yellow Pages could not maintain their hold upon local market dominance.

So, Bain undoubtedly felt that there was unrealized profitability potential in the state-owned YP company in Italy. During such a speculative period, it’s not clear to me whether they managed to get a sweetheart deal in the purchase, nor whether Seat Pagine Gialle was knowingly undervalued. Without digging deeply into it, I would guess it might have been bought at a reasonable valuation (consider that privatization of government-owned enterprises may be full of unknown risks, and transition pains to commercial ownership might have some hidden costs, too).

When sold off at twenty-eight times the original valuation, Bain Capital almost certainly had to know that this was hyperinflated. But, irresponsibly exuberant valuations were happening with many companies during the Bubble timeframe, and all of the companies involved seemed hyperinflated in value. Analysts and economists were issuing warnings as well about there being a bubble — the only trick was knowing when it might be best to step off the merry-go-round. Bain stepped off at the right time. In investing, there’s a philosophy that one should definitely sell if one’s holdings have grown very significantly in value, in order to lock-in profits. If it looks like you can sell your company for more than twenty times what it was purchased-for only three years back, it would seem foolhardy not to sell. I would suspect this was the strategy that Bain Capital followed at that time.

Now, did Bain Capital know ahead of time that YP companies were all headed for a major decline? In 2000, this still wasn’t entirely clear. While numbers of the YP industry analysts had foretold that the print Yellow Pages books would eventually become obviated, there was still a very widespread belief that YP companies’ ads could evolve into purely electronic products, and that income from these products might replace those of print. The main area where analysts have differed over the years was in terms of timeframe — predicting exactly when phonebooks would jump the shark is difficult to do.

It was around the year 2000 when profits of YP companies began to head towards stagnation, followed by sharp declines. But it wasn’t for a few years more when it started to be clearer that profits from internet YP ads were not going to make up for the loss in print YP ads. Print ads had accrued such high pricing over time, due to the near-stranglehold the incumbent directory held in any given area (the “official” Yellow Pages books in any given locality were partnered/owned by the official local telephone companies, and those primary YP books usually had the greatest usage and thus the most advertisers). Internet ads were/are so much cheaper, and in the online arena there were so many more competitors for local business advertising — other online YPs, directory sites, map sites, and search engines.

So, I think the Bloomberg article should’ve touched upon the fact that multiple major Yellow Pages companies have experienced a downturn since 2000. Leaving that out tends to make it imply that something intentionally diabolical was going on. Again, I’m nonpartisan and not a Romney supporter necessarily — I’m just pointing out that a bigger-picture portion of this story appears to’ve been left out.

The Italians understandably are unhappy that the YP company lost a large chunk of value, and one can see why they’d want to blame Bain Capital, since that company profited out of the transaction. However, Seat Pagine Gialle was headed for a sharp decline in worth along with other major YP companies, worldwide. Bain Capital was clever or lucky or both — in this game of musical chairs, the music stopped and Bain won the game while the new owners of the Yellow Pages were left holding the bag — along with the Italian people.

I’m going to have to read further in-depth about the Seat Pagine Gialle deal, however. The article states that at least three books were written about the deal, and a number of newspaper columns. Interesting!


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