What could be more worthless than the stack of Yellow Pages directories gathering dust in the foyer of my apartment building? Fourteen brand-new books have sat there untouched for weeks, in a building that has only 10 apartments. Clearly, someone has grievously overestimated the demand for Yellow Pages in my corner of Manhattan, where everybody has Internet access and can let their fingers do the walking online when they need to locate a lamp store or call for a limousine to the airport. None of us can be bothered to risk a herniated disc by stooping to pick up one of these shrink-wrapped codexes of commerce and lugging it upstairs.
Why, then, have Wall Street's smart-money players anted up $11 billion recently to buy the Yellow Pages units of Sprint, Qwest, and BCE? This is Gutenberg's revenge: The new-economy telecommunications firms, sinking under their unmanageable debt loads, are being bailed out by old-fashioned print.
All three firms had borrowed heavily to invest in the digital future, including fiber-optic networks that carry Internet traffic. The future having not yet arrived, the firms were forced to sell off assets to pay down their debt. Buyout specialists such as Kohlberg Kravis Roberts & Co. are among the few firms with enough spare cash these days to take advantage of the telecom fire sales. And which assets are they eager to bid on? Not the fiber-optic networks. They want the Yellow Pages.
Kohlberg Kravis led a group that paid $1.9 billion for the Yellow Pages of BCE, the corporate parent of Bell Canada. Sprint's Yellow Pages were sold to R.H. Donnelley (a marketer of Yellow Pages advertising) for $2.2 billion. Qwest's went to the buyout firms The Carlyle Group and Welsh, Carson, Anderson & Stowe for about $7 billion—reportedly the biggest leveraged buyout since Kohlberg Kravis' famous 1989 takeover of RJR Nabisco, the deal that inspired the book Barbarians at the Gate.
Nobody is going to write a best seller about the acquisition of Qwest's Yellow Pages business. Yet this deal serves as a coda for the '90s telecom boom in the same way that the RJR deal marked the end of the masters-of-the-universe era. Call it back to basics: Yellow Pages, unlike data networks, are hugely profitable. Few retail businesses can afford not to have an ad in the local directory, and once in the book these firms tend to automatically renew their ads year after year. Yellow Pages revenue in the United States totaled $13.6 billion in 2001 and is trending higher, despite the current advertising depression. Yellow Pages, in short, are pure gold for their publishers, which is why the banks now are lining up to help fund these recent buyouts.
Yes, the Yellow Pages are going online, like everything else in life. But the high valuations being placed on them are based less on their presumed digital future than on their physical present, in the form of paper directories. The $11 billion is not a risky bet on a fading technology. These are high-margin businesses that generate terrific cash flow. The struggling telecoms would not sell these units if they had a choice, but they don't. (If only WorldCom had a big Yellow Pages business to sell, it might not be in bankruptcy court today.)
So, the barbarians are back at the gate, grasping hungrily at a resolutely old-fashioned business. I find that strangely comforting, even as I pick my way past the 14 directories obstructing my foyer. Um, make that 13—I finally picked one up the other day, carried it upstairs, and pitched it into a closet. No doubt I'll consult it from time to time—it's faster than waiting for my computer to boot up for an online search.
Of course, if I had broadband access I wouldn't have to wait; and if everybody had broadband, the telephone companies would finally make money on their fiber networks. On such hopeful suppositions an enormous stock market bubble ballooned. Now that it has popped, investors are reconsidering the solid appeal of the Yellow Pages, which are prosaic yet profitable and likely to stay that way.