Are RBOC Yellow Pages the Big Game?

The Journal goes on to predict that Carlyle won't be the largest buy-out fund for long. At least three other companies "are expected to be as big or larger." Michael Klein, head of global banking at Citigroup said, "the capital is there, the financing is there and the kinds of companies willing to consider it are there."

Buy-out companies don't make money sitting on a pile of cash. That's why the headline of the story is "Carlyle's $10 Billion Puts Private Equity in Hunt for Big Game." Every major private equity firm and bank have called on the RBOCs' CFOs and strategic planners to talk to them about the benefits of a sale.

Here's the back of the envelope math. The three RBOCs generate roughly $1 billion-$2 billion each in EBITDA. Let's take Verizon, whose EBITDA last year was approximately $1.7 billion. At a multiple of 8, that means it would cost something over $13 billion. Not too long ago that would not have seemed like too big a deal. In fact, it would be the second largest private equity deal in history.

However, Verizon sold its Canadian operations to the second highest bidder in order to get the deal done quickly. Similarly, they moved fast in selling their other international directory businesses. Even after capital gains, this would give Verizon a sizable chunk of money to pay back debt (particularly if they do the MCI deal) and/or invest in fast-growing wireless and DSL businesses.

BellSouth and SBC have similar fast-growing businesses and joint ownership of YellowPages.com, which is devoted to the fast-growing local search/IYP business.

Carlyle and Goldman Sachs, among others, have had a taste of the money that can be made in the Yellow Pages business. It seems to me the stars are aligned.