DEX ONE CORP DEXO
December 09, 2012 - 12:17pm EST by
seeker
2012 2013
Price: 34.00 EPS $0.00 $0.00
Shares Out. (in M): 212 P/E 0.0x 0.0x
Market Cap (in $M): 58 P/FCF 0.0x 0.0x
Net Debt (in $M): 1,997 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Undervalued Bond
  • Print media
  • Merger

Description

This is quick write up, due to the timely development. I recommend long DEX One 14% bonds expiring at 01/29/2017. The bond has a Pay In Kind clause, which allows the company to pay 50% of the interested in bonds. It has been trading in the mid 20s before the merger between Dex One and SuperMedia was announced. The bond is trading as distressed level, because DEX One was will not be able to refinance it bank loans and had to go into restructure as early as 2014. The price jumped to 40 cents after the initial announcement of the merger in August (details below). It traded back down to low 30s because the company could not reach agreement with the bank loan holders. On Dec.6th, the companies announced that they have reached agreement with lender steering committee. The price of the bonds has not changed since the recent announcement.  I believe due to the merger and new credit agreement the probability weighted PV of the bonds has significantly changed. Due the the following reason. The odds of the combined company surviving and paying back the principals in full has increased. The underlying asset supporting the bonds has improved, as the cash flow profile has improved in each of four silos after the merger (also the number of silos supporting the bonds increases from 3 to 4.). The expected number of coupon to be collected increased due to the maturity extension of the bank loans (from 2014 to the end of 2016.). 34 cents represents an attractive risk/reward profile.

DEX ONE Corp. (DEXO) and SuperMedia are advertising and marketing agencies that provide a range of advertising solutions to small and medium sized businesses through various channels for its customers to advertise in "yellow pages" and online portals. Their primarily customers are small and medium businesses. For more background, please check out the write by banjo1055 on DEXO’s equity. Obviously the industry is facing both cyclical headwinds and secular decline. Revenue has been declining in the mid teen. Both companies are trying to move into Digital distribution to offset the dying printing business. DEX One has been more successful in diversifying their business. Their digital revenue will grow in excess of 30% this year and accounts for about 20% of the total revenue. The declining of the business has been de-accelerating and the company has been able to cut expense to keep EBITA margin at low 40%s. The management is projecting revenue to be stabilized around 2016.

In August, DEXO and SuperMedia announced merger agreement. Dex Media, Inc. wiill become publicly-traded successor to Dex One. The ownership of new company will be 40% SuperMedia / 60% Dex One. The goal is to achieve National scale, share technology platform and achieve expense synergies.

  • $150–175MM of annual run-rate expense synergies
You can find the breakdown of cost savings on the recently filed 8k.

  • $200–275 MM of cash flow due to preservation of Dex One tax attributes and potential creation of additional tax deductions as a result of the transaction
The SuperMedia silo will have the ability to utilize savings resulting from Dex One’s tax attributes, ~$1.8 billion at 2012 year-end. It will provide additional $200-275 million of cash flow over the forecast period

The combined company is expected to generate 2657M revenue and 1094M EBITA this year. The management guided the revenue to be stabilized at 2B and EBITA around 719M, assuming 175M cost synergy is achieved.

The new agreement with lender extended the banks loans at each silo to the end of 2016. In exchange for the maturity extension, interest rate and Increased mandatory amortization at all Dex One credit silos are increased. Separated excess cash flow after mandatory amortization into three buckets, resulting in over 80% of the quarterly free cash flow after amortization being used to retire debt at every silo including
• Par sweep: Sweeps at par
• Discounted Prepayment Portion of ECF: Company has 180 days after the end of each quarter to use this portion to tender for bank debt; otherwise cash must be used as a par reduction of the outstanding loan balance
• Borrower’s Discretionary Portion of ECF: Can be used for discounted tenders of the bank debt at Company’s discretion




This is the baseline estimates at each silo levels

RHDI

         
 

2013

2014

2015

2016

End of 2016

Principle

725

660

590

531

479

Amortization

40

40

30

25

 

Par Sweep

10

15

14

12

 

Discounted Prepayment

15

15

15

15

 

total Principle reduction

65

70

59

52

 

Interest

70.69

64.35

57.53

51.77

 

?

DEX East

         
 

2013

2014

2015

2016

End of 2016

Principle

482

400

316

245

172

Amortization

65

55

45

45

 

Par Sweep

14

24

19

20

 

Discounted Prepayment

3

5

7

8

 

total Principle reduction

82

84

71

73

 

Interest

47.00

39.00

30.81

23.89

 
           

DEX West

         
 

2013

2014

2015

2016

End of 2016

Principle

446

366

284

204

123

Amortization

45

45

45

45

 

Par Sweep

22

23

21

22

 

Discounted Prepayment

13

14

14

14

 

total Principle reduction

80

82

80

81

 

Interest

43.49

35.69

27.69

19.89

 
           

Super Media

         
 

2013

2014

2015

2016

End of 2016

Principle

1346

1227

1084

945

814

Amortization

0

0

0

0

 

Par Sweep

100

121

117

109

 

Discounted Prepayment

19

22

22

22

 

total Principle reduction

119

143

139

131

 

Interest

156.14

119.63

105.69

92.14

 




?
My baseline assumption assumes the combined company can achieve cost synergy at the middle of the guidance, revenue decline gradually slows and EBITA margin decline to mid 20s. This margin assumption is conservative, because the high margin digital revenue will like to offset the margin pressure from de-scaling.



 

2012

2013

2014

2015

2016

Revenue

2657

2,312

2,310

2,309

2,309

Rev % change

-14.00%

-13.00%

-0.07%

-0.03%

-0.01%

EBITA Margin

41.17%

38.00%

34.00%

28.00%

25.00%

EBITA (no Synergy)

1,094

878

785

647

577

Synergy

0

-17

75

150

167.5

Adjusted EBITA

1,094

861

860

797

745

Net Debt (excluding the bond)

2999

2653

2274

1925

1588

Interest (excluding the bond)

317.30

258.67

221.72

187.69

169.89

NET Debt/ EBITA

2.74

3.08

2.64

2.42

2.13




My bear case assumes revenue slows to single digit decline and the company only redeems the half of the loan at discount.

 

2012

2013

2014

2015

2016

Revenue

2657

2,312

2,080

1,935

1,838

Rev % change

-14.00%

-13.00%

-10.00%

-7.00%

-5.00%

EBITA Margin

41.17%

38.00%

34.00%

28.00%

25.00%

EBITA (no Synergy)

1,094

878

707

542

460

Synergy

0

-17

75

150

167.5

Adjusted EBITA

1,094

861

782

692

627

Net Debt (excluding the bond)

2999

2678

2327

2007

1699.5

Interest (excluding the bond)

317.30

261.11

226.88

195.68

181.55

NET Debt/ EBITA

2.74

3.11

2.97

2.90

2.71




Even in the bear case, I believe the company should be able to service all the debt until the end of 2016. There are two scenarios. 1, at the end of 2016 the company is not able to roll its debt and enter into restructure. or 2, bank loans are rolled and the bonds are paid in full.

In the first senario, the question is the terminal value of the company at the end of 2016. In my baseline scenario, Even the company pays half of the interest in kind and does not buy back any bonds. The total outstanding bonds at the end of 2016 is ~288M. If the company is able to stabilize the revenue and generate 745M EBITA,  bond holders are pretty safe even with a 3.5 multiple. In my bear case and assuming there NO terminal value left for the bondholders, the NPV with 5% discount rate is 30.3 cents, roughly 10% lower than the current price. At 10% discount rate, the NPV is 29.5 cents. If the bondholders are paid in full, the expected NPV event with 10% discount rate is 124.5, that is 266% higher than the the current price.
 
RISK:
Although the company has reached agreement with the steering committee it still need additional support from other lenders as well as the shareholders.  I do not expect equity holders to vote down this deal. The company still need (a) holding more than 2/3 of the outstanding loans under each Credit Facility and (b) representing more than50% of Dex One’s lenders under each Credit Facility.
According to the recent 8k, I believe the deal go through is relatively high.
"As of the effective date of the Support Agreement, the lenders party thereto held approximately 41% of the outstanding aggregated principal amount under the Dex Media East, Inc. credit facility, 63% of the outstanding aggregated principal amount under the Dex Media West, Inc. credit facility, and 35% of the outstanding aggregated principal amount under the R.H. Donnelley Inc. credit facility."
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Finalized the merger and achieve cost synergy as expected.
    sort by    

    Description

    This is quick write up, due to the timely development. I recommend long DEX One 14% bonds expiring at 01/29/2017. The bond has a Pay In Kind clause, which allows the company to pay 50% of the interested in bonds. It has been trading in the mid 20s before the merger between Dex One and SuperMedia was announced. The bond is trading as distressed level, because DEX One was will not be able to refinance it bank loans and had to go into restructure as early as 2014. The price jumped to 40 cents after the initial announcement of the merger in August (details below). It traded back down to low 30s because the company could not reach agreement with the bank loan holders. On Dec.6th, the companies announced that they have reached agreement with lender steering committee. The price of the bonds has not changed since the recent announcement.  I believe due to the merger and new credit agreement the probability weighted PV of the bonds has significantly changed. Due the the following reason. The odds of the combined company surviving and paying back the principals in full has increased. The underlying asset supporting the bonds has improved, as the cash flow profile has improved in each of four silos after the merger (also the number of silos supporting the bonds increases from 3 to 4.). The expected number of coupon to be collected increased due to the maturity extension of the bank loans (from 2014 to the end of 2016.). 34 cents represents an attractive risk/reward profile.

    DEX ONE Corp. (DEXO) and SuperMedia are advertising and marketing agencies that provide a range of advertising solutions to small and medium sized businesses through various channels for its customers to advertise in "yellow pages" and online portals. Their primarily customers are small and medium businesses. For more background, please check out the write by banjo1055 on DEXO’s equity. Obviously the industry is facing both cyclical headwinds and secular decline. Revenue has been declining in the mid teen. Both companies are trying to move into Digital distribution to offset the dying printing business. DEX One has been more successful in diversifying their business. Their digital revenue will grow in excess of 30% this year and accounts for about 20% of the total revenue. The declining of the business has been de-accelerating and the company has been able to cut expense to keep EBITA margin at low 40%s. The management is projecting revenue to be stabilized around 2016.

    In August, DEXO and SuperMedia announced merger agreement. Dex Media, Inc. wiill become publicly-traded successor to Dex One. The ownership of new company will be 40% SuperMedia / 60% Dex One. The goal is to achieve National scale, share technology platform and achieve expense synergies.

    • $150–175MM of annual run-rate expense synergies
    You can find the breakdown of cost savings on the recently filed 8k.

    • $200–275 MM of cash flow due to preservation of Dex One tax attributes and potential creation of additional tax deductions as a result of the transaction
    The SuperMedia silo will have the ability to utilize savings resulting from Dex One’s tax attributes, ~$1.8 billion at 2012 year-end. It will provide additional $200-275 million of cash flow over the forecast period

    The combined company is expected to generate 2657M revenue and 1094M EBITA this year. The management guided the revenue to be stabilized at 2B and EBITA around 719M, assuming 175M cost synergy is achieved.

    The new agreement with lender extended the banks loans at each silo to the end of 2016. In exchange for the maturity extension, interest rate and Increased mandatory amortization at all Dex One credit silos are increased. Separated excess cash flow after mandatory amortization into three buckets, resulting in over 80% of the quarterly free cash flow after amortization being used to retire debt at every silo including
    • Par sweep: Sweeps at par
    • Discounted Prepayment Portion of ECF: Company has 180 days after the end of each quarter to use this portion to tender for bank debt; otherwise cash must be used as a par reduction of the outstanding loan balance
    • Borrower’s Discretionary Portion of ECF: Can be used for discounted tenders of the bank debt at Company’s discretion




    This is the baseline estimates at each silo levels

    RHDI

             
     

    2013

    2014

    2015

    2016

    End of 2016

    Principle

    725

    660

    590

    531

    479

    Amortization

    40

    40

    30

    25

     

    Par Sweep

    10

    15

    14

    12

     

    Discounted Prepayment

    15

    15

    15

    15

     

    total Principle reduction

    65

    70

    59

    52

     

    Interest

    70.69

    64.35

    57.53

    51.77

     

    ?

    DEX East

             
     

    2013

    2014

    2015

    2016

    End of 2016

    Principle

    482

    400

    316

    245

    172

    Amortization

    65

    55

    45

    45

     

    Par Sweep

    14

    24

    19

    20

     

    Discounted Prepayment

    3

    5

    7

    8

     

    total Principle reduction

    82

    84

    71

    73

     

    Interest

    47.00

    39.00

    30.81

    23.89

     
               

    DEX West

             
     

    2013

    2014

    2015

    2016

    End of 2016

    Principle

    446

    366

    284

    204

    123

    Amortization

    45

    45

    45

    45

     

    Par Sweep

    22

    23

    21

    22

     

    Discounted Prepayment

    13

    14

    14

    14

     

    total Principle reduction

    80

    82

    80

    81

     

    Interest

    43.49

    35.69

    27.69

    19.89

     
               

    Super Media

             
     

    2013

    2014

    2015

    2016

    End of 2016

    Principle

    1346

    1227

    1084

    945

    814

    Amortization

    0

    0

    0

    0

     

    Par Sweep

    100

    121

    117

    109

     

    Discounted Prepayment

    19

    22

    22

    22

     

    total Principle reduction

    119

    143

    139

    131

     

    Interest

    156.14

    119.63

    105.69

    92.14

     




    ?
    My baseline assumption assumes the combined company can achieve cost synergy at the middle of the guidance, revenue decline gradually slows and EBITA margin decline to mid 20s. This margin assumption is conservative, because the high margin digital revenue will like to offset the margin pressure from de-scaling.



     

    2012

    2013

    2014

    2015

    2016

    Revenue

    2657

    2,312

    2,310

    2,309

    2,309

    Rev % change

    -14.00%

    -13.00%

    -0.07%

    -0.03%

    -0.01%

    EBITA Margin

    41.17%

    38.00%

    34.00%

    28.00%

    25.00%

    EBITA (no Synergy)

    1,094

    878

    785

    647

    577

    Synergy

    0

    -17

    75

    150

    167.5

    Adjusted EBITA

    1,094

    861

    860

    797

    745

    Net Debt (excluding the bond)

    2999

    2653

    2274

    1925

    1588

    Interest (excluding the bond)

    317.30

    258.67

    221.72

    187.69

    169.89

    NET Debt/ EBITA

    2.74

    3.08

    2.64

    2.42

    2.13




    My bear case assumes revenue slows to single digit decline and the company only redeems the half of the loan at discount.

     

    2012

    2013

    2014

    2015

    2016

    Revenue

    2657

    2,312

    2,080

    1,935

    1,838

    Rev % change

    -14.00%

    -13.00%

    -10.00%

    -7.00%

    -5.00%

    EBITA Margin

    41.17%

    38.00%

    34.00%

    28.00%

    25.00%

    EBITA (no Synergy)

    1,094

    878

    707

    542

    460

    Synergy

    0

    -17

    75

    150

    167.5

    Adjusted EBITA

    1,094

    861

    782

    692

    627

    Net Debt (excluding the bond)

    2999

    2678

    2327

    2007

    1699.5

    Interest (excluding the bond)

    317.30

    261.11

    226.88

    195.68

    181.55

    NET Debt/ EBITA

    2.74

    3.11

    2.97

    2.90

    2.71




    Even in the bear case, I believe the company should be able to service all the debt until the end of 2016. There are two scenarios. 1, at the end of 2016 the company is not able to roll its debt and enter into restructure. or 2, bank loans are rolled and the bonds are paid in full.

    In the first senario, the question is the terminal value of the company at the end of 2016. In my baseline scenario, Even the company pays half of the interest in kind and does not buy back any bonds. The total outstanding bonds at the end of 2016 is ~288M. If the company is able to stabilize the revenue and generate 745M EBITA,  bond holders are pretty safe even with a 3.5 multiple. In my bear case and assuming there NO terminal value left for the bondholders, the NPV with 5% discount rate is 30.3 cents, roughly 10% lower than the current price. At 10% discount rate, the NPV is 29.5 cents. If the bondholders are paid in full, the expected NPV event with 10% discount rate is 124.5, that is 266% higher than the the current price.
     
    RISK:
    Although the company has reached agreement with the steering committee it still need additional support from other lenders as well as the shareholders.  I do not expect equity holders to vote down this deal. The company still need (a) holding more than 2/3 of the outstanding loans under each Credit Facility and (b) representing more than50% of Dex One’s lenders under each Credit Facility.
    According to the recent 8k, I believe the deal go through is relatively high.
    "As of the effective date of the Support Agreement, the lenders party thereto held approximately 41% of the outstanding aggregated principal amount under the Dex Media East, Inc. credit facility, 63% of the outstanding aggregated principal amount under the Dex Media West, Inc. credit facility, and 35% of the outstanding aggregated principal amount under the R.H. Donnelley Inc. credit facility."
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Finalized the merger and achieve cost synergy as expected.
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