SuperMedia Inc. and Dex One Corporation , two of the nation’s largest "yellow page" companies, announced earlier this week that they have filed for Chapter 11 bankruptcy protection. This is part of a plan to merge into one entity. According to Dex One’s General Counsel Mark W. Hianik, the merger will result in annual savings of $175 million.
The merger plan, revealed in August 2012, has received support from shareholders as well as a majority of the company’s lenders. As per the Chapter 11 petition, Dex One has $2.84 billion in assets and $2.79 billion in debt.
SuperMedia has declared assets of $1.4 billion and $1.9 billion of debt. SuperMedia’s Chief Financial Officer has said that the companies will be able to utilize $1 billion in net operating losses from Dex One to save around $400 million in income taxes in the future.
This is not the first time these companies have filed for bankruptcy. In 2009, SuperMedia filed, emerging only in December that year, with Dex One following suit the next month. The single entity formed out of the merger is expected to exit bankruptcy in 60 days.
What this development draws attention to is the dwindling fortunes of the yellow pages business. There are several indications that the directory business is steadily shrinking. With the proliferation of digital media, the likes of Google Inc. (GOOG - Free Report) and Yelp, Inc. (YELP - Free Report) have challenged the paper directory business in a manner it is finding difficult to combat.
For instance, leisure-related searches, such as restaurant locations, have moved almost completely online. This has led yellow page companies to invest more in improving their digital business, through which their customers can have an online presence.
Additionally, many larger companies have sold or spun off their directories businesses. In fact, the companies in question, Dex One and SuperMedia were both formed as a result such moves. Dex One was formed out of the directories businesses of Sprint Nextel Corp. (S - Free Report) and Qwest Communications, which no longer exists.
Similarly, SuperMedia was created after the directory business of Verizon Communications Inc. (VZ - Free Report) , spun off in 2006, went bankrupt in 2009. And last year AT&T, Inc. (T - Free Report) sold a significant portion of its directory business to Cerberus Capital Management.
In fact, the Verizon spin-off, which is the subject of much controversy and litigation, provides further evidence. Creditors of the directory business have claimed that Verizon did not reveal that the yellow pages subsidiary’s revenue had declined in excess of 10% in major markets. This is because customers were increasingly opting to advertise online because of the greater availability of broadband Internet services.
Of course, this is not to suggest that this segment has run out of steam altogether. In 2011, 422 million yellow page directories were distributed as per research company Simba Information.
Additionally, directory companies accounted for 7.6% of total advertising revenue in the U.S. in 2011, taking into account both print and digital sales. According to market research firm BIA/Kelsey, $6.9 billion worth of advertising revenue was spent on yellow pages advertising in the same year.
The opportunity for yellow pages lies with local advertising. According to BIA/Kelsey, local media advertising revenue is expected to amount to $148 billion in 2017. This is a 2.3% annual increase from the $132.5 billion in 2012. These forecasts were revealed in the market research firm’s new report “U.S. Local Media Forecast (2012-2017)” released on Monday.
Almost all major directory companies now have a significant online presence. The opportunity lies in expanding this presence to cater to smaller businesses who lack the know how to advertise on the Internet. This includes purchasing keywords online, as well as creating and maintaining their Facebook (FB) pages in addition to the conventional ads in print directories.
Of course, even such a strategy may not be enough to help yellow pages firms recover, given the competition in the digital space. This is where the major challenge lies.
According to the new BIA/Kelsey report, the share of digital advertising expenditure in local markets will increase from 17.4% in 2012 to 27.6% in 2017. How yellow pages retrain their employees and garner funds to develop their digital businesses will be the key to determining their survival and future success.