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Kyle Bass Buys Stakes in Merging Yellow Pages Companies
Posted by: Holly LaFon (IP Logged)
Date: December 20, 2012 05:24PM

Kyle Bass, founder of the Dallas-based hedge fund Hayman Advisors, has picked up two new stocks, GuruFocus Real Time Picks reports. They are: Dex One Corp. (DEXO) and SuperMedia Inc. (SPMD).

Bass sold more than half of the positions in his portfolio in the third quarter, dropping the total number to five, with a total investment value of $70.32 million and a 78.6% weighting in the consumer cyclical sector. The two new buys bring the total to seven.

Bass’ outlook for the global economy includes concern over the effects of perpetual quantitative easing, increasing deficits, potential inflation and fiscal profligacy in the actions of central bankers and monetary authorities.

“We have a hard time understanding how the current situation ends any way other than a massive loss of wealth and purchasing power through default, inflation or both,” he wrote in his November letter to investors.

Both of Bass’ new stocks are merging yellow pages publishers that have experienced massive losses in market value over the past three years after emerging from bankruptcy.

Dex One Corp. (DEXO) and SuperMedia Inc. (SPMD)

Bass bought 5,064,550 shares of Dex One Corp., equal to a 9.95% stake in the company, on Dec. 12 for approximately $1.30 per share on average.

With local market intelligence and team of market consultants, Dex One is a marketing company that helps local businesses identify, attract and retain new customers. It began trading on the NYSE in February 2010 for near $30 per share. Since then, its price has dropped 94.56% to $1.65 per share in Thursday trading. It is also down 3% year to date.

On Dec. 4, Dex One received a notification from the NYSE that its closing price was below the minimum required price for listing of $1.00 per share for a consecutive 30 trading-day period. The company responded by announcing a 1 for 5 reverse stock split to pull its price up. It has until its annual meeting of stockholders to meet the NYSE’s requirement.

In August, the company announced that it would combine with Dallas-based SuperMedia Inc. (SPMD), the other stock that Bass bought on Dec. 12. Bass took a 9.96% stake in SuperMedia, buying 1,560,941 shares of the company for about $2.70 per share on average.

SuperMedia, a publisher of yellow pages directories, has seen its stock has decline 91.45% over the past five years and increase 23% year to date.

In a stock-for-stock transaction, the merger will create a single social, local and mobile marketing solutions provider to local businesses. The new business would have over 5,800 employees, 3,100 consultants and 700,000 businesses as clients. Dex One shareholders will own about 60% of the company, and SuperMedia shareholders will own about 40%.

"We believe this merger is in the best interests of shareholders, lenders, customers, employees and consumers," said Alan Schultz, chairman of the board of directors of Dex One. "Dex One and SuperMedia are closely aligned with a solid value proposition for local businesses, and we expect the transaction to generate significant operational and financial synergies, which will create additional investor value."

Both SuperMedia and Dex One underwent Chapter 11 bankruptcy in 2009, as customers began to depend increasingly on digital search instead of physical directories, and exited bankruptcy in 2010.

Since then, SuperMedia’s revenue declined from $2.5 billion in 2009 to $1.64 billion in 2011, and net income fell from $8.3 billion in 2009 to a net loss of $771 million in 2011. Dex One’s revenue increased from $991 million in 2010 to $1.48 billion in 2011, and net losses eased from $942 million to $519 million.

The unified company in 2011 would have had $3.1 billion in revenue, $778 million in operating income and $1.2 billion in adjusted EBITDA.

It would also experience cost savings of $150 million to $175 million by 2015 due to “scale efficiencies; rationalization of duplicative solutions, products and vendor relationships; headcount reductions; and adoption of the most cost effective management and operating practices and technology platforms and systems from Dex One and SuperMedia,” the company said in a statement.

The transaction was expected to close in the fourth quarter of 2012, but was pushed back in the first half of 2013 when both companies reworked their debt obligations. The companies announced on Dec. 6 that they had reached an agreement with their lending steering committee to extend the maturity dates of their senior secured debt up to 26 months until Dec. 31, 2016, and upheld the economics terms of the merger.

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Guru Discussed: Kyle Bass: Current Portfolio, Stock Picks
Stocks Discussed: DEXO, SPMD,
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