AT&T Inc. (T) is in talks to sell a majority stake in its Yellow Pages unit to Cerberus Capital Management LP in a transaction that values the entire business at about $1.5 billion, said two people familiar with the matter. AT&T would retain a substantial minority stake in the division, and a deal could be reached this month, said the people, who declined to be identified because the negotiations are private. Dallas-based AT&T, which is being advised by Citigroup Inc. (CITI) and Bank of America Corp., has held talks with several buyout firms on the unit, one of the people said. A final agreement hasn’t been reached and talks could fall apart, the people said. AT&T Said to Hold Talks With Cerberus on Sale of Yellow Page Tim Boyle/BloombergSales at AT&T’s directory business, which includes Yellow Pages, fell 16 percent last year to $3.29 billion.Sales at AT&T’s directory business, which includes Yellow Pages, fell 16 percent last year to $3.29 billion. The sale would allow AT&T, which hung on to its Yellow Pages division as competitors fled the business, to reduce its exposure to a unit facing increasing competition from online rivals Google Inc., Groupon Inc. (GRPN) and Yelp Inc. To boost sales, AT&T, the biggest U.S. phone company, is focusing on its mobile- service unit, a business where it trails Verizon Wireless. “There is no real market for yellow pages businesses anymore,” said Craig Moffett, a Sanford C. Bernstein & Co. analyst in New York, who rates the stock “market perform.” AT&T “wants to shed the businesses that are shrinking the fastest to boost its overall growth rate.” Fort Worth, Texas-based TPG Capital was among buyout firms that looked at the business, though the firm’s interest waned in recent days, according to two people familiar with the matter. Spokesmen for AT&T, Cerberus and TPG declined to comment, as did those for Citigroup and Bank of America. Slumping Sales Sales at AT&T’s directory business, which includes Yellow Pages, fell 16 percent last year to $3.29 billion. The company’s website says it’s the biggest Yellow Pages publisher in the world by revenue, with more than 1,250 titles published in 22 states. The company recorded 48 cents a share in asset impairments on the directory operations in the fourth quarter, when it reported a loss of $1.12 a share. The directory businesses “are in a fairly steady decline,” AT&T Chief Executive Officer Randall Stephenson said in a March 1 investor meeting. “We’re obviously going to have to look at areas -- look at options in terms of what we do with those assets.” Beyond Turning Around AT&T rose 0.4 percent to $31 at the close in New York. The deal under discussion would value the AT&T business at about 1.5 times earnings before interest, taxes, depreciation and amortization, Moffett said. Verizon Communications Inc. (VZ) exited its yellow-pages business at 6 times Ebitda about six years ago, he said. “The window has long since closed for divesting yellow- pages businesses for a meaningful price,” Moffett said. Because the business is in irreversible decline, a buyer will just seek to earn a return that exceeds the purchase price before closing it down, he said. “For a business like this, you can value it relatively straightforwardly as the present value of the remaining cash flows before the business is entirely gone,” Moffett said. “They’re not forecasting a particularly long life.” To persuade local businesses to stay with its service and compete with the Web rivals’ various offerings, AT&T’s YP.com last year started offering daily deals to consumers. Cerberus, based in New York, has been raising money, including a $4 billion flagship private-equity fund. Recent investments include the $1.02 billion acquisition with Chatham Lodging Trust of 64 hotels from Innkeepers USA Trust in October. Private-equity firms have made several investments in Yellow Pages businesses in the past decade, drawn by the traditionally steady cash flow. KKR & Co. bought France Telecom SA’s PagesJaunes SA in 2006, while Hicks Muse Tate & Furst Inc. and Apax Partners LLP agreed to buy BT Group Plc’s Yellow Pages unit in 2001. To contact the reporter on this story: Cristina Alesci in New York at calesci2@bloomberg.net To contact the editors responsible for this story: Katherine Snyder at ksnyder@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net
AT&T May Sell Off Many DSL Markets
We recently noted how AT&T's U-Verse expansion is essentially over, and if you haven't seen your market upgraded yet you probably aren't going to. So what happens to a little less than half of their current customers still on older DSL technology? Like Verizon -- who offloaded millions of users in somewhat ugly deals with Frontier and Fairpoint, it appears that AT&T is looking to sell off many DSL markets and keep their focus on wireless.
AT&T's recently on record stating that they can't find an "economically viable" way to upgrade these users, despite a looming increase in faster and less expensive last mile DSL technologies. The company's also recently on record stating that they believe DSL is "obsolete" -- a troubling claim since that's their primary product. According to the latest DSLPrime newsletter from Dave Burstein, all signs point to the fact that AT&T's gunning to sell many DSL markets off, provided they can find a buyer.
That’s essentially all of AT&T not reached by U-Verse. Stankey is “doing a rapid tech evaluation” of whether they can upgrade their DSL + wireless to “a competitive broadband product.” But Randall “doesn’t see a solution.” If that’s confirmed, “we’re looking for others who might want the properties.” Stankey’s competent. Looking at bonded/vectored DSL he may change the company’s plans. Randall’s mantra, however, is "We are a wireless company." It's unclear if any of the “rural carriers” – Century, Frontier, Windstream – have the financial ability to make an attractive offer. If operators can’t raise the money, T would need to make a financial transaction. A complicated spinoff retaining the growing parts of the company is one possibility. There’s probably an interesting way to lose pension and deferred tax liabilities if they make that choice. All the big private equity firms are looking at bids.
The sale could involve anywhere between 10 and 25 million DSL lines. AT&T would then follow Verizon's lead and focus on selling capped, expensive LTE service to many more rural users, who primarily have the choice of slow, overpriced satellite, or slow, over-priced DSL (both, if they're "lucky"). The complete lack of interest in upgrading DSL lines in more than half of the United States is great news for cable companies, who'll be able to jack up rates for a decade as the only ISPs in many markets capable of anything close to next-gen speeds.
AT&T: The U-Verse Build is Over
Like FiOS, If You Didn't Get it Already, You Probably Won't
In May of last year AT&T confirmed that at the end of 2011 they'd effectively be stopping their deployment of U-Verse upgrades, with 30 million homes passed (not necessarily served), leaving about 40-45% of their footprint on older, slower technologies. On their recent earnings call AT&T again confirmed that the U-Verse build is "largely complete," and the focus now is on ramping up adoption in deployed areas. As we recently noted, Verizon has also frozen any additional FiOS expansion outside of large city franchise agreements, leaving roughly 40% of their customers without upgrades.
AT&T CEO Randall Stephenson, who last year insisted that DSL was "obsolete" (a problem since that's all AT&T offers) also touched on the plight of the rural user during the recent call. In short, AT&T claims that despite consistent, healthly profits and recently having started charging data overages, they just can't find a financially appealing way to upgrade millions of users, and won't anytime soon:
"Our U-verse build is now largely complete, so we have in place an IP video and broadband platform that reaches 30 million customer locations, which gives us significant headroom now to drive penetration," Stephenson said. "We have been apprehensive on moving, doing anything on rural access lines because the issue here is, do you have a broadband product for rural America? And we’ve all been trying to find a broadband solution that was economically viable to get out to rural America and we’re not finding one to be quite candid."
Forgotten is the fact that AT&T and Verizon (see update) played major roles in passing state laws that ban many of these communities from wiring themselves -- even if the telcos won't. Unlike smaller telcos, it's not that AT&T doesn't have the resources or funds to upgrade more users to VDSL or FTTH, they simply lack the long-term patience for serious network reinvestment. Quarterly returns and executive compensation trump network health, customer satisfaction, and product quality. Like Verizon, AT&T's solution for many of these rural customers will be for them to sign up for expensive (up to $10 per gigabyte in overages) LTE service, assuming it's available.
While the big loser here is consumers, the big winner is the cable industry, who doesn't have to worry about any real competition from faster speeds in a significant chunk of their markets. In more than half of their markets companies like Time Warner Cable get to "compete" with sluggish DSL (in many cases still topped out at 3 Mbps) for the next decade. The lack of telco upgrades for millions of users has meant huge subscriber gains for cable, whose executives should be thanking phone company executives for treating telco network reinvestment like a diabolical cancer -- despite their core product being broadband.
Updated 2/22 to note Verizon informs us they no longer lobby for state level anti-municipal bills.
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