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Yellow Pages fights hedge fund factor with buyback

Date: Wednesday, April 2, 2008
Author: Andrew Willis, Globe and Mail

Lots of executives complain that hedge fund trading weighs heavy on their stock. Yellow Pages Income Fund is actually doing something about the problem.

Yellow Pages announced Friday that it will spend up to $300-million buying back units, a program that could soak up 25 million units or 5 per cent of the trust.

It's the largest buyback a trust has ever announced - this crowd typically channels extra cash into distributions.

Yellow Pages decided to roll out the buyback after its executives met with institutional shareholders, and heard widespread frustration over what the portfolio managers saw as short-term pressure on the unit price.

The thinking is this trust swooned because hedge funds are short-selling Yellow Pages and many other advertising-based publications in the wake of weaker-than-expected results from U.S. players.

Historically, Yellow Pages' growth and cash distributions have commanded a premium valuation compared with U.S. peers.

That premium has vanished over the past three months, despite strong fundamentals at the Canadian phone book and trade publication publisher.

In simple terms, Yellow Pages owners and managers think the company is undervalued and they're acting on that theory.

Early results show they're making their point. Units that commanded $14 in January were changing hands at $10.09 Friday, when the buyback was announced. They closed yesterday at $10.90 on the Toronto Stock Exchange.

Based on the trust's financial forecasts, decreasing the number of units with a buyback will mean more cash for the remaining unitholders. In other words, spending $300-million on units is accretive to distributions.

Rating agencies were quick to give their approval to the Yellow Pages buyback, as were analysts.

TD Securities analyst Scott Cuthbertson has a $12.50 target price for units and said in a note to clients: "We view the announcement of a larger normal course issuer bid than we had modelled very positively, as it underscores management's confidence in the outlook for this business."

Buying back units now also better positions Yellow Pages for its planned conversion to a traditional corporate structure in 2011, when the federal government plans to change the tax-friendly rules for trusts.

Yellow Pages forecasts that as a corporation, it would still pay out about 70 per cent of the cash it generates to shareholders.