Who knew yellow pages were so golden?
A high-stakes bidding war could be shaping up over a San Diego-based independent phone book publisher, which last month indicated it might be shopping itself around.
TransWestern Publishing Co., the nation's second-largest independent yellow pages publisher, announced it had retained Goldman Sachs & Co. to explore "strategic alternatives," which probably means it's thinking of selling the company, analysts said. Indeed, Britain's largest phone directory publisher reportedly is mulling over a bid for TransWestern.
"It's going to be sold, and there's a lot of people who would like to have that piece of property," said David Goddard, an analyst who tracks yellow pages companies for Simba Information Inc., a market research firm in Stamford, Conn.
TransWestern publishes 338 phone directories that have a circulation of 25.7 million in 25 states from California to Louisiana to Vermont. Founded in 1980, TransWestern has gained success by starting up or acquiring phone books in smaller, community-oriented markets.
Although independent phone book publishers like TransWestern have increased their market share in recent years, yellow pages printed by phone companies like SBC Communications Inc. and Verizon Communications Inc. still dominate the market, owning an 82% share, Goddard said. But the $15.5-billion yellow pages industry is ripe for profitable competition, analysts said, especially in markets where advertisers are starved for a cheaper yellow pages alternative.
TransWestern says its phone books are popular among small to mid-size businesses that would otherwise pay higher ad rates to be in dominant phone books published by local telephone companies. An ad in an independent book can cost half of what local phone companies charge, Goddard said.
Publishing a phone book is also relatively simple -- only once a year do companies need to sell ads to each advertiser and distribute books.
"Its reach is ubiquitous, and its [production] cost is much lower than, say, a newspaper," said Charles Laughlin, an analyst with Kelsey Group of Princeton, N.J. "But yet a yellow book, you keep it there all year."
TransWestern, owned since 1997 by a small group of investors that includes senior management and Boston-based buyout firm Thomas H. Lee Co., is a model of how the yellow pages business can thrive, analysts said.
TransWestern said its revenue tripled to $371 million in 2004 from $109 million in 1998 and its cash flow jumped to $110 million from $33 million in the same period. The company, which employs more than 2,500 people, doesn't release its net profit figures.
The Telecommunications Act of 1996 helped spur the rapid expansion of the independent yellow pages market. It forced phone companies to sell their white pages listings to independent publishers, giving them a better book to market.
That brought increased interest from investors, leading to a buying spree among independent directory publishers in recent years. TransWestern, for example, has gobbled up 41 companies since 1995, including the Arnold Directory chain, which publishes in Burbank and Pasadena, and WorldPages.com, an Internet phone directory.
"It's become an extremely lucrative business," Goddard said.
It's so lucrative that Britain's top phone directory firm, Yell Group, may make a $1.3-billion bid for TransWestern, according to the Sunday Times of London, which didn't cite sources.
Such a union would cement Yell's hold on the U.S. independent yellow pages directory market, which it entered in 1999 when it bought Yellow Book USA, the No. 1 directory.
Yellow Book prints more than 500 directories in 43 states and the District of Columbia. It circulates 82 million copies of its editions annually.
Spokesman Jon Salmon said Yell Group was "aware of recent speculation" but declined to comment. TransWestern spokeswoman Kim Beales also declined to comment about a possible sale.
An acquisition of TransWestern would expand Yellow Book's territory nationwide, including California, analyst Laughlin said. TransWestern also publishes directories in suburban San Diego, Orange County and the Inland Empire.
"Yellow Book wants to be bigger and more national," Laughlin said. "If you have a true national footprint, ultimately your ability to sell national advertising improves. The question just comes down to price."
Other investment firms with stakes in phone directories are probably interested, Goddard said.
He said they included New York-based media conglomerate Hearst Corp., which bought Buffalo, N.Y.-based White Directory Publishers Inc. in September; Boston-based buyout firm Bain Capital, which bought a Canadian yellow pages company for $1.5 billion in November and sold it in March for $2.1 billion; and Carlyle Group, a Washington buyout firm that with another company purchased Qwest Communications International Inc.'s yellow pages division for $7.1 billion in 2003.
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Company fact sheet
Here are some basic facts about TransWestern Publishing:
Product: Telephone directories
Number of directories: 338
States served: 25 including California, Connecticut, Florida, Massachusetts, Michigan, Nevada, New Jersey, New York, Texas, Utah, Washington and Vermont.
Acquisitions: 41 with 193 directories since 1995
Ownership: Privately held by a small group of investors including senior management and Thomas H. Lee Co.
*--* Revenue Cash (In millions) flow 1998 $109 $33 2004 $371 $110 *--*
Source: Company reports