R. H. Donnelley filed for bankruptcy in May of 2009 after missing a $55 million interest payment to creditors, but the seeds of its bankruptcy were planted more than five years earlier when Dex Media borrowed $1.5 billion to pay a special dividend to its private equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe. The two Private Equity firms acquired Dex Media from Qwest Communications International in a 2003 LBO for a total purchase price of $7 billion, and were subsequently able to recoup their entire equity investments of $775 million each through a series of special dividends, as reported by the WSJ on Sept. 21, 2005. Dex Media was taken public at $19 a share in early 2005, and R.H. Donnelley acquired Dex Media in a cash and stock deal later that year, which also involved R. H. Donnelley assuming $5.3 billion in debt, bringing Donnelley to a total of $10.7 billion in debt.
A look at the S-1 statement for Dex Media’s initial public offering shows that the lead underwriters for the January 2005 IPO were Lehman Brothers, Morgan Stanley and Merrill Lynch, and that the company had an 8-to-1 debt equity ratio on 9/30/2004. The risks section of the S-1 stated that “our substantial indebtedness could adversely impact our financial condition, and impair our ability to operate our business” and went on to say “despite our substantial indebtedness, we may still incur significantly more debt.”
Lesson Learned: Dex Media’s underwriters were right on both counts. R. H. Donnelley’s total debt load, including the debt assumed in the Dex Media acquisition, deprived it of the needed financial cushion in the face of tough competition and adverse economic conditions.
Why Businesses Go Bankrupt: FairPoint Communications
FairPoint Communications filed for bankruptcy under Chapter 11 on October 26, 2009, hampered by interest payments resulting from the excessive debt it took on in the $2.3 million acquisition of Verizon’s northern New England landlines and Internet network in early 2008. Remarkably, FairPoint Communications CEO David Hauser was quoted as saying this about the bankruptcy filing, “From a consumer point of view, this is a nonevent.” FairPoint Communications has been plauged by complaints from retail, business and wholesale customers since changing over from Verizon computers to its own computer systems, the “New Hampshire Union Leader” recently reported. Prior to that, in mid-2008, Vermont 911 calls were not being properly routed, with state officials assigning blame to FairPoint.
Lesson learned: A look at FairPoint’s 10-k report shows that its long term debt went from zero in 2007 (the year before the acquisition) to $2.1 billion at the end of 2008, while net income (profits after interest and tax) went from a profit of $32.8 million in 2007 to a loss of $68.5 million in 2008. I completely agree with the many bloggers who have already opined that it is hard to understand what the regulators in Maine, New Hampshire and Vermont were thinking would happen when they approved FairPoint’s acquisition of the assets being spun off by Verizon. Reguators should have considered the advice my friend Cotty, a financial advisor in Toronto gives his clients: you may be able to make the down payment on a fancy new house, just be sure you can also handle the “cost of ownership.”
Tags: bankruptcy, David Hauser, FairPoint Communications