Deal of the month – Thomson Directories goes Back to the Future: CIBC Wood Gundy leveraged finance has completed its first LBO m

The GBP220 million ($358 million) deal was led on CIBC’s behalf by recent hire Jonathan Rowland, and revived some long-standing relationships dating back to the buyout of Lloyds of London Press (LLP) in 1995.

That was when Rowland then at Samuel Montagu first worked in tandem with the corporate finance team at Coopers & Lybrand (C&L), subsequently integrated into PwC. The C&L team on the LLP deal included Stephen Green, who is now at Apax Partners (Apax) and was one of their key executives on the latest Thomson deal.

In early 1997, the C&L team was mandated to advise 3i on its potential acquisition of Thomson Directories from USWest. Once again, C&L turned to a team Rowland was part of BZW (now Barclays Capital) to provide debt finance, alongside Intermediate Capital Group.

The original GBP80 million ($130 million) deal completed in May 1997, having been complicated by the fact that Gary List the CEO of Thomson Directories was both selling the business on behalf of USWest and attempting to buy it along with Linda Pancratz, the business development director. In addition the Thomson management, which had run the business prior to its acquisition by USWest, was wanting to buy back control.

In the event, the bid by 3i, Advent International and BZW in support of List and Pancratz won the day, though there was some initial scepticism in certain quarters as to whether the deal would be a success. “At the time, people said the type of deal we were trying to put together was relatively aggressive. Because List and Pancratz were implementing a wholesale review of the business, there were people questioning whether they could achieve the fundamental step change they were really seeking to attain,” says Rowland.

He maintains that they have proved the doubters wrong through the strong performance of the business since the original buyout. The directory has undergone a redesign, one element of which is to make it smaller than A4 size so that it will typically sit on top of a stack of publications, meaning that more people refer to it. They have also implemented changes to the content of the magazine with a more local’ focus in order to drive up advertising revenue. There has also been a cost rationalisation programme, with previously sub-contracted pre-press photo composition work for some of the advertising brought back in-house. The business also entered into a long-term licence with Thomson for the use of its brand name. Management has also been supplemented by the recruitment of Kevin Watson as finance director.

In the time since the original buyout, Thomson Directories’ market share in revenue terms has increased from 14 per cent to 16 per cent, equivalent to approximately GBP3 million ($4.9 million) per annum, and enabling it to close the gap on BT’s Yellow Pages, its nearest market rival.

Having seen the business meet its initial plan, 3i and Advent decided to attempt a partial realisation of their investments, and appointed CSFB to organise an auction process in February of this year. There were a number of interested parties both trade and financial but Apax and CIBC eventually emerged as preferred bidders. On the financing side, the package offered 3i and Advent the opportunity to re-invest in the business while ceding majority control to Apax, while also providing capital to fund the next stage of growth.

Equally, the bid was assisted by the relationships forged at the time of the original buyout. Rowland had gained the trust of the management team, as well as 3i and Advent. In addition, the relationship formed with Stephen Green on the aforementioned Lloyds of London Press transaction made for a smooth process. Green worked on this deal for Apax alongside Tom Hall and Richard Tudor in a team led by Toby Wyles, whom Rist had worked with at CSFB. The Coopers & Lybrand team, now part of PwC, was also brought in to provide due diligence, a natural appointment given its existing knowledge of the business.

So why has Apax not a bidder for the business at the time of the original buyout decided to throw its hat into the ring now? “Media is one of our core areas of specialisation. We are particularly excited about helping the company explore opportunities presented by the Internet and by continental European expansion,” asserts Wyles.

Through a joint venture with Infospace of the US, which has provided Thomson Directories with Internet technology, the company is significantly ahead of its market rivals in terms of Internet revenues, which are forecast to be approximately GBP3 million ($4.6 million) this year. What Apax will be aiming to do alongside the management team is convert advertisers in the printed directory to Internet advertising. This will be assisted by an agreement with Lycos providing an immediate link to the Thomson website for anyone searching for business directory information, making the space more attractive to potential advertisers.

Another potential growth area is through acquisitions. “In continental Europe, a number of state-owned telephone companies are looking at divesting printed telephone directories, which they see as fairly non-core,” says Rowland. “We will work in conjunction with management on exploiting the opportunities over the next year or two, and there are already a number of things under consideration.”

Indeed, in the time since the original buyout, the firm has already made one foray onto the Continent through a joint venture with Deficom in Belgium. This followed a merger between the two largest players in the Belgian market which the management believes leaves a vacuum for someone to take a strong number two position. As in the UK, the aim is to offer a product with a local, rather than regional, focus. The joint venture company is set to produce its first directory later this month.

The structuring of the deal sees CIBC putting in place GBP160 million ($261 million) of banking facilities. As well as plain vanilla senior debt and working capital, there is also a layer of subordinated debt in bridge form the intention being to refinance the bridge with a high yield issue later this year. Rowland says that one of the reasons why Apax opted to put together a bid alongside CIBC was its experience in leading several high yield issues for Transwestern Publishing, a leading independent Yellow pages publisher in the US. It was also influenced by the fact that Heinz Noeding, who worked on these issues, recently moved to CIBC’s London office from New York.

The issue will be predominantly in sterling, and Rowland is confident it will be a success given what he sees as increasing maturity in the European high yield market evidenced by recent issues such as Kappa Packaging and Giraudy. “Since the deal being announced we’ve had a lot of enquiries, both from banks on the senior debt side and investors on the high yield side, saying we know the business, we’ve heard about the success of the original LBO, and we’re very keen to look at it,” asserts Rowland.