What is my general predisposition that has caused me to write this?
I am completely opposed to the purposeful destruction of wealth.
The following is my opinion. I could be wrong. I frequently am. If I am wrong, please email me and set me right. I certainly hope that all equity holders vote against this unnecessary recapitalization plan and fight for what is being lawfully taken away from us. What is lawful is not always just. The intent is to commit fraud.
Let’s start with a definition:
Fraud. Fraud is a generic term embracing all the ways that a person or entity can falsely represent a fact to another in order to induce that person to surrender something of value.
It is hypothesis that the management of Yellow Media is effectively committing financial fraud in order to induce the equity holders to surrender over 80% of their ownership of the future discounted cash flows of the parent company to debt holders.
I believe that it is criminal behavior for a company that:
- Is current with all of its debt obligations.
- Can meet its future debt obligations as they come due from existing cash flow.
TO DO a recapitalization.
Here’s another useful definition:
Extortion. Extortion occurs when an entity illegally obtains property from another by actual or threatened force, fear or violence, or under cover of official right.
I believe that the present situation of crisis market pricing has caused the debt holders to engage in public distortion of the facts in order to scare away any potential equity interests.
Fairness:
In all fairness, I believe that there are two forms of obligations:
- Debt
- Equity
Debt holders are and should be entitled to their principle and interest. Equity holders are entitled to that which is left over after the debt holders are paid in full.
Under the present recapitalization plan:
- The debt holders get a majority of an operating company with EBITDA of $500M+ per annum and $250M of free cash flow per annum with 0 repayment risk.
- The equity holders get pretty much squat. They went from owning $250M a year of free cash flow to owning less than $50M a year of free cash flow. This is fraud given the context that the recapitalization is COMPLETELY UNNECESSARY.
Questions that Management Cannot Answer:
- Why isn’t the company looking for alternative emergency financing from various investors like Warren Buffett? Paying 15% interest on a loan like this is far better for common shareholders than diluting their equity 80%.
10 years from today:
I challenge you to forecasting out the cash flows across the next 10 years for Yellow Media making reasonable assumptions. Take a look at DEXO and SPMD and the entire Phone Book industry in aggregate. If you look at the future cash flows, what you will see is that the bondholders and debt holders before and after this recapitalization plan basically are slated to make FAR MORE than they ever put up in capital. SINCE WHEN ARE DEBT HOLDERS ENTITLED TO MORE THAN THEY PUT UP PLUS INTEREST?
And that, ladies and gentlemen, is why I question the validity of this recapitalization plan, regardless of the fairness of opinion and all that jazz. This is just plain fraud as I see it. What is mine is being stolen from me as management proactively sabotages the value of my shares. I am not pleased. I think that I could do a far superior job of maximizing shareholder value. I think that my decision making abilities are superior since I believe I have a better understanding that management’s number one purpose is to increase the value to common shareholders as they stand today. It is my opinion that the decision to recapitalize comes from a failure to understand that this is their goal.
I hope that this serves as a reminder, that we do exist. We are here. You have been doing an excellent job up until you agreed to screw us out of what is ours.
This is management taking the easy way out. What is easy is not always right.
Just because you want a lower debt ratio does not mean that you should force that as an assumption and give what someone owns outright to someone else who doesn’t deserve it. That is pre-approved theft in its simplest form.
Thanks so much. Someone had to say it, and that someone might as well be me.
Glen Bradford