Valuing a Cross-Border LBO: Bidding on the Yell Group Harvard Case Solution & Analysis


Is Yell a good buyout candidate?

            There are two different business lines belonging to Yell and both of these lines are currently operating in two different markets. Although both the business lines are operating in the different markets but still the cash flows of both the businesses are steady despite the impositions by the Office of Fair Trading which limited the increase in the advertising rates in the UK market. The future interest expenses could be easily covered with the combined cash flows from the projected EBITDA of both the businesses.

            Along with this all the buyout candidates which are considered as good have a defendable and strong market position and this is 100% true for both the lines of the businesses. The Yellow Pages business of US is the leader in the publication of the business directories and the BT Yellow Pages of UK is the market leader of the classified directory business. Furthermore, the business lines could also be divested easily in the future when the need arises as there are many potential buyers interested in this purchase.

            Lastly, if we compare the industry life cycle stages of both the UK and the US business then it could be said that the US business is in the growth phase while the UK business has reached the maturity phase. These factors are going to ease out the exit strategy in future. Therefore, based on the above range of factors it could be said that Yell is a good LBO candidate.


How would you approach Yell’s valuation? In particular, how will your valuation incorporate the fact that cash flows are in pounds sterling and dollars?

            The valuation of the Yell Group would become more complex in this case because normal valuation would incorporate the issues related to cross border differences. The cross border assets of Yell are denominated into different cash flows and therefore, due to that reason both of the businesses would be generating revenues from their respective lines of businesses. Therefore, in order to resolve the valuation difficulties both the assets would be locked as separate entities. Based on the financial projections of each business expressed in their home countries separate valuations have been performed for both the businesses.

            In order to calculate the representative discount rates the comparable companies have been used which has been unlevered. The differences in the risk free rates have also been incorporated and the respective cost of equity has been calculated for UK and USA. Furthermore, the tax shield has been calculated by taking a tax rate of 30%. This is because the base operations are located in UK and therefore, everything has been consolidated in UK currency which is sterling pounds.

            In building the valuation model, the growth potential, nature of the business, competitors, local business strategy and the market potential has been considered for each of the respective businesses. Once the value of each business would be calculated then the spot exchange rate could be used to convert all the figures into pounds and the enterprise value could be calculated easily. Since, this is a case of cross border valuations therefore; there would be significant exchange risk inherent. Therefore, in order to mitigate that the buyer could consider making the use of the derivative products such as options or futures available in the market.


Do the management projections in Exhibits 6 and 7 make sense to you? In other words, if you were part of the Apax / Hicks Muse team, would you trust them?

            The management of the company had provided the projections for the UK and the US business to Apax and Hicks Muse team. These projections are based on a number of assumptions and they have been prepared on the basis of what a potential buyer would expect from the business for the upcoming years. However, being a part of the Apax and Hicks Muse team one should be skeptical regarding the projections of both the businesses that have been provided by the management.

            Assessing the projections from the point of view of the financial buyers, more attention should be placed upon how the management of the company would meet the future projection estimates rather than tracking the current performance of the business. All the figures that are provided in the case exhibits by the management should be viewed with a grain of salt as the management of the company would have done everything to make the figures look attractive and real to all the potential buyers................

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