NOT AN ANALYST

Idearc, one of the largest publishers of yellow pages directories in the United States and leading online search providers, is expecting to emerge from bankruptcy by the end of the year. The Company filed for bankruptcy protection under Chapter 11 on March 31^st, blaming the downturn in the economy, a shift in advertising demand from print to online, and a high debt levels as result of the spin off from Verizon Communication in 2006. The Court approved the amended Plan of Reorganization on December 22, 2009.

Creation of Idearc The Company was formed in 2006 as a spin-off from Verizon Communications.  The terms of the spin-off were the following: Idearc issued shares of the Company to Verizon shareholders; it issued Senior Unsecured Notes of 2,850 mm and transferred to Verizon 2,500 mm in cash generated from the proceeds of the creations of the Tranche A and B Term Loan.

Capital Structure Most of the debt was incurred as part of the spin off and it is comprised of a Credit Agreement of 6,400 mm (Tranche A Term Loan 1,515 mm, Tranche B Term Loan 4,665 mm and Revolver 250 mm), Senior Unsecured Note of 2,850 mm, SWAP with fair value of 498 mm another SWAP with fair value of 1.9

Plan of Reorganization Owners of the 6,400 Credit Agreement will receive the pro-rated amount of a new Term Loan of 2,750 mm with a 6 years term @ LIBOR + 800 bps  95% of the post re-org new equity. Unsecured Debt holders will receive 10% of the reorganized company. Upon emergence, the Company will have 150 mm in cash and a cash Sweep will be established, with 67.5% of excess cash used to repay debt each year starting in 2010. Certain reorganization events happened in 2009 and are worth noting: the Company used 600 mm in cash available to run operations post petition and therefore no DIP financing was needed. The two swap agreements were settled for 424 mm. In April, a 250 mm payment to Secured Debt holders (188mm of principal and 62 mm in accrued interest) for adequate protection was made.  

Advertising Industry and Company’s outlook Idearc is another media Company that has been hit severely by the weakening demand in the advertising market. Among others, you can find Citadel Broadcasting, Heartland Publications, and RH Donnelly etc. Recent improvement in technologies and powerful internet search engines are replacing printed and radio advertising. On September 15, the Management forecasted the sales growth rates for the Company and for the advertising industry for the next 4 years. The outlook is grim. The demand for printed advertising, which accounts for about 85% of Idearc’s total revenue, is expected to drop double digits in the next 2 years and then stabilize at negative a 7% growth rate. However, revenue from Superpages.com, which accounts for 15% of Idearc’s total revenue, is expected to improve in the coming years with double digit growth after 2010.

Valuation The spreadsheet contains EBITDA forecasts based on the 8K filing released on September 15. Capital expenditures will be around 42 mm for 2009 and they will increase 5% each of the following year. I will assume no change in working capital for simplicity. The “Now-IRR” indicates recovery rates from the prospective of the bank lenders; therefore it indicates recovery from par. The post re-org equity assigned to the bank lenders amounts to 685 mm, and it will decrease through time as EBITDA will deteriorate. In the end of 2013, the lenders will be able to recover 84% of their principal, which is poor. But if you had bought all the bank debt in April when it was trading at 45 cents a share, then you would realize a nice 38% IRR at the end of 2010, comprised of a new 2,750 mm Term Loan, 250 mm in cash, 685 mm in equity and 303 mm in interest. Unsecured Debt holders are left with nothing basically.

Conclusion The Idearc’s new common stock that will be issued in 2010 doesn’t seem to have much appreciation potential given the current business model. If the Company can modify its operations and focus more on search engines and online advertising revenue, then EBITDA forecasts can be revised higher and maybe see more equity value in the coming years.

Citadel Broadcasting filed a voluntarily petition under Chapter 11 on December 20 2009 with a pre packaged restructuring plan supported by more than 60% of it secured lenders. The Company listed 2,464 mm in liabilities and 1,400 mm in assets. The First Day Motions were granted today and the Company will use 36 mm of cash on hand plus cash generated from operation to conduct business during the bankruptcy proceeding. No DIP financing will be needed.

Business Overview The Company is a major player in the radio broadcasting industry and it operates through two segments: Citadel Radio, which owns and operates radio stations across the country and accounts for two thirds of the revenue, and Citadel Media, which produces news and talk programming.

Capital Structure The Senior Revolving and Term Facility were amended for the fourth time on March 26 2009 to include a monthly EBITDA test and monthly liquidity test. The Company anticipated that it will be in compliance with its covenants through the end of 2009 (150 mm EBITDA and 25 mm in cash) but it didn’t expect to meet the financial covenants requirements on January 15 2010 (150 mm of cash on hand, 30 mm in cash anytime, postpone maturity date of convertible to on or after 2014 and Senior Secured Debt leverage of 6.75x by December 2010).

 One of the main balance sheet issues for Citadel Broadcasting is over leverage. The Company was able to do get away with high debt levels in 2007 and prior years due to lax financial covenants and lack of impairment tests of goodwill and intangibles. The Plan of Reorganization will cut 1,400 mm in debt and will address the over leverage issue, but I am not sure how happy Secured Debt holders will be. I have not worked the numbers yet, but it might take few years for them to recover their principal amount in terms of equity appreciation. I will work out a model in the coming weeks.

Plan of Reorganization  The pre petition Secured Creditors will receive a pro rata share of a new Term Loan in the principal amount of 762.5 mm with a 5 year term @ LIBOR + 800 bps and 90% of the new common stock. The Convertible Note holders will have the option to receive a pro rata share of 10% of the new common stock or cash equal to 5% of unsecured claims (capped at 2%). Common stock, preferred, options, warrants will be cancelled.

EBITDA Forecast The Company is going to end up with 180 mm in EBITDA in 2009, a 28% drop from the previous year. In the next 3 to 4 years, I expect EBITDA to grow in at 2%-3% rate each year, far away from the 11%-12% growth rate experienced in 2006-2007, after the ABC Radio merger in February 2006. Besides the economic downturn, that is still keeping advertising expenses low, the demand for advertising is shifting from radio to online technologies like Google. People surf the web more than they listen to the radio, so why should you advertise your product on the radio? On top of that, the Company recognizes six industries that generate most of revenue: automotive, retails, medical, financial, entertainment and food stores. Three out of the six are still experiencing cost cutting and low top line growth, so it’s tough to project double digits EBITDA growth levels for the coming years. Stick around for more forecasting and valuation analysis in the next few weeks.