Verizon unit likely to be snatched up by buyout firms

While the domestic directories unit at Verizon Communications may invite a peek by internet search engines Google and Yahoo, buyout firms will be the most likely bidders, analysts and private equity executives said today.

Verizon, the largest US telecoms company, said on Sunday it would look at selling or spinning off the unit as it focuses on its wireless, high-speed data and corporate customers.

The unit, Verizon Information Services, provides sales and publishes services for about 1750 telephone directories in 44 states and Washington, DC Analysts say it could fetch anywhere from US$13 billion ($18.47 billion) to more than US$17 billion.

The phone directories business is an area that search engines are seeking entry into, as the once sleepy market is emerging as a key battleground.

Major internet firms see local search as a way to move beyond traditional Web search by helping people find details of businesses such as nearby restaurants and shops.

But lately the industry has been prime territory for buyout firms -- Apax Partners and the Carlyle Group among them -- that are attracted to its traditionally strong cash flows, which can help pay down debt used to finance the deals.

"This is going to be one of those deals where you have large buyout funds take a look with a limited amount of strategics," said Kevin Waldman, managing director at private equity firm Veronis Suhler Stevenson, which has a history of investing in the directories sector.

"From a private equity standpoint, these businesses have predictable cash flow which lends itself well to leverage, and there is a fair amount of renewability in terms of revenue stream," Waldman said.

"And not to take away from the business, but it's very down-the-fairway," he said.

"It's simple -- I'm not saying easy -- but simple enough where people can get their arms around it."

Private equity firms, because they often lack the expertise of a corporate buyer, prefer to manage easy-to-understand businesses.

Last year, Verizon agreed to sell local phone-book and other operations in Hawaii to Carlyle for US$1.65 billion and sold SuperPages Canada to buyout firm Bain Capital for US$1.54 billion.

In another directories deal, R.H. Donnelley Corp agreed in October to buy Dex Media Inc, whose majority shareholders are Carlyle and fellow buyout firm Welsh, Carson, Anderson & Stowe.

Though search engines are interested in the space, some think it's too early for technology companies to go on a buying spree, particularly in area that is historically low growth.

"The relationship between that local seller and that local advertiser -- the pizza store -- is very meaningful, and it's very difficult to break through that being Google and Yahoo and everybody else," said Waldman, of Veronis Suhler Stevenson, who added that he would not be surprised if Google took a close look at Verizon.

Regardless of which group, if any, pursues the unit, it is expected to command a hefty price.

In the last year, directories businesses have been valued at around 10 times earnings before interest, taxes, depreciation and amortisation -- a key cash flow indicator.

Valuation levels at eight times EBITDA are considered frothy in most private equity circles.

Verizon's unit is the second-largest US directories business, with projected 2005 revenues of US$3.5 billion and US$1.75 billion EBITDA, according to Deutsche Bank analyst Viktor Shvets. He valued the unit at around US$13 billion.

Analyst Jeff Halpern of Bernstein & Co said that a good deal from Verizon could prompt similar moves in the sector.

BellSouth and SBC Communications Inc, now known as AT&T after it acquired that company in November, joined together last year to buy Yellowpages.com and combine their own telephone directory services for an online service.

"If (Verizon) is successful at selling it with a strong valuation there's nothing to stop BellSouth and AT&T from looking to unlock similar value in their directory business," Halpern said.

- REUTERS