Buyout Firms Acquire Yellow Pages Business
Qwest Communications agreed to sell its yellow pages
business, QwestDex, to a consortium led by the Carlyle Group and Welsh, Carson,
Anderson and Stowe for $7.1 billion. In a two-stage transaction, Qwest sold the
eastern half of the yellow pages business for $2.75 billion in late 2002. This
portion of the business included directories in Colorado, Iowa, Minnesota,
Nebraska, New Mexico, South Dakota, and North Dakota. The remainder of the
business—Arizona, Idaho, Montana, Oregon, Utah, Washington, and Wyoming—was
sold for $4.35 billion in late 2003. Caryle and Welsh Carson each put in $775
million in equity (about 21% of the total purchase price), making this the
largest LBO since the $25 billion buyout of RJR during the late 1980s (see Case
Study 11-5). Qwest was in a precarious financial position at the time of the
negotiation. The telecom was trying to avoid bankruptcy and needed the
first-stage financing to meet impending debt repayments due in late 2002. Qwest
is a local phone company in 14 western states and one of the nation’s largest
long-distance carriers. It had amassed $26.5 billion in debt following a series
of acquisitions during the 1990s. Carlyle Group is a Washington, D.C.–based
investment group led by former defense secretary Frank Carlucci and has
invested more than $12 billion throughout the globe. The group invests mainly
in defense and aerospace businesses, but it has also invested in companies in
real estate, healthcare, bottling, and information technology. Welsh Carson
focuses primarily on the communications and healthcare industries. While the
yellow pages business is far afield from their normal areas of investment, both
firms were attracted by its steady cash flow. Such cash flow could be used to
trim debt over time and generate a solid return. The business’s existing
management team will continue to run the operation under the new ownership.
Financing for the deal will come from J.P. Morgan Chase, Bank of America,
Lehman Brothers, Wachovia Securities, and Deutsche Bank. The investment groups
agreed to a two-stage transaction to facilitate borrowing the large amounts
required and to reduce the amount of equity each buyout firm had to invest. By
staging the purchase, the lenders could see how well the operations acquired
during the first stage could manage their debt load. The new company will be
the exclusive directory publisher for Qwest yellow page needs at the local
level and will provide all of Qwest’s publishing requirements under a 50-year
agreement contract. Under the agreement, Qwest will continue to provide certain
services to its former yellow pages unit, such as billing and information
technology, under a variety of commercial services and transitions services
agreements (Qwest, 2002).
Case Study Discussion Questions
1. Why was QwestDex considered an attractive LBO candidate?
Do you think it has significant growth potential? Explain the following
statement: “A business with high growth potential may not be a good candidate
for an LBO.”
2. Why did the buyout firms want a 50-year contract to be
the exclusive provider of publishing services to Qwest Communications?
3. Why would the buyout firms want Qwest to continue to
provide such services as billing and information technology support? How might
such services be priced?
4. Why would it take five very large financial institutions
to finance the transactions?
5. Why was the equity contribution of the buyout firms as a
percentage of the total capital requirements so much higher than amounts
contributed during the 1980s?