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YELLOW MEDIA INC. Message Board

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  • peristentone peristentone May 9, 2012 8:14 PM Flag

    Will They Bribe Equity?

    Even with your ultra-bearish assumptions, equity is getting shafted here.

    And in your cup-half-empty view, Yellow has no future and the business goes to zero. I think that is flatly wrong. In a rural area like Canada there is baseline of print directory activity that will never erode away. It's a smaller footprint business, but I think you have not made a convincing case that it will ever be a zero footprint.

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    • This is entirely an off-the-cuff opinion, I am by no means an expert on CCAA. But I would expect that the creditors committee will propose a pre-pack bankruptcy in which all equity is extinguished.

      There's really no reason to bribe the equity with even 1% of the restructured company. The arguments for paying off the equity are that it would speed up the process and save money on legal fees, but I don't see how that's possible. First, as Roneyh suggests, there's not enough value here to pay off equity holders even at current market prices. Second, arranging a special shareholder vote is costly and takes time in itself. Third, consider that they couldn't even get a quorum for the AGM; how are they ever going to get enough shareholder votes for a complex restructuring? So the chance of an affirmative vote on a voluntary resturcturing plan is nil.

      Fourth, there will always be -some- shareholder who will object to the restructuring plan, no matter how juicy it is for the common, and will sue and slow things down regardless. And finally, regarding the cost savings argument: if I'm the creditors committee, I would likely see $15mm in legal fees to avoid paying $9mm to equity as a fair tradeoff. After all, that means my net effective cost of legal fees is only $6mm. And don't forget, the lawyers we will engage are also my pals that I play golf with on the weekends.

      So at this point, in a restructuring scenario I see the most likely outcome for both common and preferreds as being zero recovery. The only possible saving grace is that a bankruptcy judge somehow views that as unfair, and throws out the prepack on that basis. But equity is risk capital, and so that kind of sympathy from a BK judge for the most speculative tranches would be rare indeed (absent any firm evidence to back up the case for positive equity value, which for YLO there is none).

      What are the chances that a prepack could be blocked by representatives of the equity? I also see that as a non-starter. Now that YLO has written off the goodwill, and the balance sheet shows -$800mm in equity, it will be effortless to persuade a judge that the company is insolvent. And so the path is clear for a CCAA to happen at any time.

      I don't disagree with your point that there is some residual value to this business. But it's almost certainly less than the amount of debt owed, so that's not what's at issue here. To be brutally honest, given the latest miserable quarterly results, g.brad will never have the chance to see his thesis tested -- that the company could earn its way out of trouble. If the creditors committee can agree on a plan, and if they throw a bone to management and/or the board to get their buy-in, then this reorg could happen real soon now.