Advertising downturn hits Yell

With the recession continuing to bite, the advertising market is proving to be a tough place to earn a living. In fact, advertising agency Group M said last month that global advertising spend was expected to fall 5.5 per cent during 2009, with spend in western Europe forecast to slide 11.1 per cent. Moreover, with Group M expecting a further 1.5 per cent decline in global advertising spend in 2010, a sectoral recovery looks unlikely to get properly under way until 2011. That grim trading backdrop is proving especially tough for advertising directory specialist, Yell.

Indeed, in its trading update last week, Yell said that cash profits in the first quarter to the end of June had fallen by around 20 per cent (in constant currency terms) on the same period last year, with revenues dropping by about 11 per cent. But, in a sign that the worst is yet to come, management also said that Yell's second-quarter cash profit was expected to slide by a hefty 30 per cent on the comparable period last year, with revenues set to fall 17 per cent. "During this calendar year, the total volume of advertising industry spend has shown marked declines across all media in each of the regions in which the group operates," reported management in the statement.

The group looks especially hard hit in Spain where its Publicidad operation - which generates 26 per cent of group revenues - saw sales slide 9.1 per cent in the 12 months to 31 March 2009, with cash profits down 5.2 per cent year-on-year. And within the Spanish business Paginas Amarillas, the group's Spanish Yellow Pages directories, revenues tumbled 14.9 per cent in that period. That performance largely reflects the fact that Spain is suffering particularly badly in the recession - the unemployment rate in the country, for example, presently stands at over 17 per cent and some economists are expecting that to rise as high to as 20 per cent. In such circumstances, it's not surprising that Yell's Spanish business, which is dependent upon advertising from the country's recession-hit small traders, is struggling. Yell was forced to write down the value of the Spanish businesses by a substantial £1.1bn in the last financial year.

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Yell's US Yellowbook operation, which generates about half of the group's revenues, doesn't look so healthy, either. Sales there fell 2.4 per cent in 2008-09, while cash profits fell 4 per cent, which is hardly surprising given that the country is in still in recession. The group's UK business isn't in much better shape either - UK revenue fell 5.5 per cent in 2008-09. Indeed, the only bright spot appears to be in Yell's online operations, which grew revenues by 38 per cent last year and now account for 15 per cent of group sales.

Investors will also need to keep an eye on the group's hefty £4.2bn net debt pile - during 2008-09, that left Yell with a huge £299m finance charge and, on current terms, analysts at broker Numis Securities expect the group to breach its banking covenants by the year-end. Management is beginning to tackle that and, with last week's trading update, Yell signalled that it was looking to "comprehensively refinance the group" and will hold discussions with lenders with a view to extend the maturity of the group's borrowings and to change the terms of those facilities.

But that process won't complete until the autumn and Yell also plans to hold "discussions with its principal shareholders" - potentially a code for arranging a rights issue. Analysts think that Yell would need to raise at least £1bn. "Any refinancing in the absence of a stabilisation in trading would be on very onerous terms," say sector analysts at Numis Securities. "Yell's balance sheet poses serious risk to equity shareholders."