Check out a thoughtful post by Mark Clare on the Valuecruncher blog. He points out that Private Equity firms are able to raise debt (borrow money) at much lower interest rates than other potential Yellow Pages purchasers (such as Telstra, whose shareholders demand more return than low interest rates).
By plonking a huge amount of debt on the company the PE guys can make the equity portion have a much higher return. The ‘cost of capital’ in theory remains constant, but given that the debt is so low, and that these guys can raise such a huge percentage of the purchase price, it actually makes Yellow Pages more valuable to a financier than to Telecom itself.
Nice analysis, but I’m sorry Telecom – you are selling the family jewelery, though you are doing so for more than the share market is valuing it in your hands.
Lance Wiggs 