AT&T Inc. (T), the second-largest U.S. mobile service provider, will sell 53% stake in its Yellow Pages business to Cerberus Capital Management LP, a private equity firm. The deal would be worth $950 million, including debt. AT&T will receive $750 million in cash and Cerebus will assume $200 million in debt.
The Yellow Pages business is the part of AT&T’s Advertising Solutions segment, which fell 16.3% last year and represented about 3% of the company’s revenue. Profitability at the Yellow Pages business had been declining for the past several years as the telephone directories have become obsolete due to changing customer habits. The operations were highly impacted by the online service provides like Google Inc. (GOOG), Yelp Inc. (YELP) and Groupon Inc. (GRPN) that have replaced the concept of printed phonebooks. AT&T recorded $2.9 billion or 48 cents in asset impairments of its directories business in the fourth quarter of last year.
AT&T’s decision to sell off Yellow Pages was an outcome of its plan to shed some of its slower-growing assets or restructuring underperforming or non-strategic assets such as the directory business and rural access lines. Now, AT&T will focus on its core wireless, IP, cloud and application-based services.
The deal, pending regulatory approval, is expected to close in middle of the year. The transaction would have minimal effect on its earnings this year. The Yellow Pages includes AT&T’s Advertising Solutions and Interactive assets. It excludes the recently formed AT&T AdWorks, a New York-based operation that sells advertising offerings across 3-screen platforms (online, mobile and TV).
AT&T is following similar trends as that of its major rival Verizon Communication Inc. (VZ). Verizon, the largest U.S. mobile service provider, had exited its directories business in 2006.
Cerberus Capital, managed by the billionaire investor Stephen A. Feinberg, is hopeful of generating substantial cash flow from the Yellow Pages. It also believes that any growth potential in the business is likely to stem from its online and mobile initiatives.
We are maintaining our long-term Neutral recommendation on AT&T. The company retains the Zacks # 3 (Hold) Rank for the short term (1–3 months).
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