Australia’s leading telecom Telstra has sold off 70 percent of its directories unit Sensis to a U.S. based private equity firm for A$454 million, which works out to a valuation of A$649 million (US$591 million). There was speculation in the Australian press in recent days that the deal could go for as much as A$3 billion.
Given the surprisingly low valuation, the sale is generally being interpreted as a decision by Telstra to get Sensis off its books in order to protect its share price. While Sensis remains one of the world’s largest legacy directory businesses, it wasn’t a large part of Telstra. More importantly, it was seen as an old world business within a Telstra trying to position itself as a modern communications technology company.
For the year ending June 20, 2013, Sensis generated EBITDA of A$571 million on revenue of A$1.34 billion, for a 43 percent EBITDA margin.
The decision to shed Sensis may be a wise move for Telstra, but it could also be a potential boon for Platinum Equity. While Sensis does have a print business in rapid decline, it also has digital assets with the potential for growth, plus a large sales force. The opportunity to digitally enable Australian small business remains open.
A recent peer example suggests one model for Platinum to follow.
In 2012, AT&T sold a majority of its YP division to Cerberus Capital Management for a valuation of US$1.8 billion, which was seen at the time as a shockingly low price. Since then, Cerberus has certainly cut costs, but it has also brought in new talent to advance the business forward, particularly on YP’s roughly $1 billion digital business, a third of which is mobile. YP’s recent acquisition of Sense Networks, a mobile ad targeting platform, suggests Cerberus has intentions for YP that go well beyond extracting cash from the business.
On Platinum’s website, the company described its approach as “driving value through honest, intelligent operational improvement rather than financial engineering.”
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So the announcement has been made of the sale of the last remaining major Telco-owned Yellow Pages business. Today’s news from Australia that Telstra has sold 70% of Sensis to US-based Platinum Equity was not a major surprise, although many observers, myself included, feel that the Telco have not negotiated too hard, as the price appears to be a steal for Platinum. Only four years ago Sensis was flourishing with revenues of Aus$2.3bn, with accompanying margins around 62%, but their decline has been sharper than any peer by comparison, so today’s valuation (at just $650m) suggests that Telstra CEO David Thodey had just lost patience. Add to this the fact that Telstra is viewed by the Aussie public as a safe dividend stock, the lack of the $bn+ profit cheque, together with an uncertain future strategic model, has meant that the sell-off almost became an inevitability.
So what next? Australia remains a strong and relatively uncluttered market, where the digital opportunity is huge, but the new owners have to place their focus on a serious transformation journey for Sensis, starting with a more compelling product suite, particularly in digital, coupled with a fulfilment process and UX journey that is seamless and hassle-free.
There are clearly some echoes here of KKR and Solocal, and more recently Cerberus and AT&T. PE interest in the sector remains strong, and these two examples have proved that the former print-dominant YP companies can be transformed into profitable and sustainable digital services companies. It will not be easy for Platinum, especially when you consider that Telstra’s own Small Business division will now be a competitor in the sale of digital marketing products, but that said, right now this is a marketplace begging for a truly compelling solution, and there is a big pot of gold to be had for the one that gets it right.
Great summation of the situation Paul.
I agree with you on two fronts.
Firstly, Sensis will be very busy trying to get its act together for a public listing, whilst maintaining the decline of their print revenues. This will have the effect of making it difficult to maintain staff morale as they go through this further period of change (and downsizing).
Secondly, you are completely correct that this now leaves Australia as a massive untapped market. We feel that Service Central is well positioned to take up this void.