A New Merger Model Supermedia and Dex One
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turnarounds workouts Trends March/April 2014 A publication of Beard Group Innovative Solutions…… environment. According to a Local Search Association A New Merger Model Industry Usage Study, references to print yellow page di- rectories in the United States declined from 14.5 billion in SuperMedia & Dex One 2005 to 5.5 billion in 2012. That steep decline is reflected in both companies’ revenues from print and direct sales, Prepackage Their Combination and the decline is expected to continue unabated. Ac- cording to financial projections filed with the bankruptcy By Randall Reese court, at the time of the merger each company expected its he 2013 Chapter 11 respective revenues from print and direct sales to decline filings of SuperMedia between 18 percent and 21 percent annually between Inc. and Dex One 2011 and 2016 – from pro forma combined revenues of T over $2.7 billion in 2011 to expected 2016 revenues of Corporation were unique. While the filings represent- less than $1 billion. While the companies project annual ed each company’s second growth in excess of 20 percent over the same period for trip through bankruptcy revenue coming from their digital offerings, even that is court, the coordinated fil- insufficient to offset the declines from the much larger ings also represented the print business. first ever merger of two public companies through Strategic Decisionmaking parallel Chapter 11 cases, Against that backdrop, SuperMedia and Dex One agreed according to Sean O’Neal, to merge in August 2012, with Dex One being the acquiring a partner at Cleary Gottlieb company. In December 2012, the companies entered into Steen & Hamilton LLP who an amended and restated agreement and plan of merger, represented SuperMedia in which maintained the same basic economic terms of the its bankruptcy filing. Sean O’Neal Cleary Gottlieb Steen & August agreement. The amended agreement also provided Each company was Hamilton LLP that if either company were unable to obtain the requisite separately one of the largest consents to the merger from its shareholders and to con- yellow pages directory pub- templated amendments to its respective financing agree- lishers in the United States, as measured by revenue, and ments from its senior secured lenders to consummate the also offered its customers various other local marketing transactions on an out-of-court basis, the mergers could solutions, such as digital advertising products. SuperMe- alternately be effected through voluntarily prepackaged dia, which was formerly known as Idearc Inc., became an plans of reorganization under a Chapter 11 proceeding. independent public company in November 2006, when After entry into the amended and restated merger Verizon Communications Inc. completed the spin-off of agreement, both companies undertook the process of so- Idearc’s shares to Verizon’s stockholders. In March 2009, liciting the consents necessary to effectuate the necessary the company filed its first Chapter 11 case, from which it transactions. An important strategic decision was made emerged on December 31, 2009. Somewhat similarly, Dex to simultaneously solicit consents necessary to complete One was formerly known as R.H. Donnelley Corporation the merger outside of a Chapter 11 filing and votes on and was the result of a June 1998 spin-off transaction from the potential prepackaged plans of reorganization which The Dun & Bradstreet Corporation. R.H. Donnelley filed would be used if a Chapter 11 filing for either or both for Chapter 11 protection for the first time in May 2009 companies was necessary. O’Neal notes that there were and emerged as Dex One on January 29, 2010. multiple benefits to utilizing this approach. “It is a time- It would be an understatement to say that SuperMedia saving measure because you solicit votes only once, but and Dex One found themselves in a challenging business it also encourages acceptance,” he says. “If you receive T&W Trends, March/April 2014 2 something in the mail that says ‘we can do this transaction even if we “For industries where there is distress, this process presents a good alterna- don’t get a 100% vote,’ then you are more incentivized to go along with tive for accomplishing a merger of two distressed companies without having it.” to satisfy the normal consent requirements imposed outside of bankruptcy.” Dual Pre-Packs Ultimately, neither SuperMedia nor Dex One was able to obtain the the symbol DXM. Former SuperMedia “I believe the creation of Dex requisite unanimous consents to the shareholders received approximately Media is good for shareholders, lend- contemplated amendments to their 0.44 shares of Dex Media common ers, employees and clients,” said Dex respective financing agreements to stock for each share of SuperMedia Media’s Chief Executive Officer Peter effectuate the merger outside of bank- common stock they held, while for- McDonald. “It took many people ruptcy court. Therefore, on March mer Dex One shareholders received and significant effort to complete 18, 2013, each company, along with 0.2 shares of Dex Media common our transaction. We benefited from its respective subsidiaries, filed a stock for each share of Dex One com- having experienced teams at both voluntary Chapter 11 petition in the mon stock they held. “This process companies, as well as at our financial United States Bankruptcy Court for was very beneficial to shareholders and legal advisors.” the District of Delaware. “We had to because it allowed the sharehold- “One of our main goals was not utilize the bankruptcy court because ers to retain the exact value in the only to allow the merger to go ahead the Bankruptcy Code allows debt to in-court solution that they would with less than 100 percent creditor be amended with less than 100 per- have obtained in the out-of-court support, but also to make it a quick, cent approval of the lenders,” notes solution,” O’Neal says. All creditors controlled process that would not O’Neal. “In SuperMedia, we had bank also received 100 percent recoveries get side-tracked by litigation,” says lenders who did not consent to the under the prepackaged plans. O’Neal. “Of course, the side benefit extension of the maturities under the to that is that it becomes a much less credit agreement that were required to Synergies and Benefits costly bankruptcy.” allow the merger to proceed.” Con- currently with the bankruptcy filings, In an investor call regarding He also suggests that these trans- the companies sought confirmation the merger, Dee Jones, Dex Media’s actions set important precedents to of their prepackaged plans of reor- Chief Financial Officer, highlighted be considered in the future. “For in- dustries where there is distress, this ganization with the support of over some of the key anticipated benefits process presents a good alternative 90 percent of both companies’ senior of the merger. “This transaction will for accomplishing a merger of two secured lenders and shareholders. bring annual cost synergies of $150 distressed companies without hav- ing to satisfy the normal consent requirements imposed outside of “One of our main goals was not only to allow the merger to go ahead with less bankruptcy. I could see this being replicated for public and non-public than 100% creditor support, but also to make it a quick, controlled process that companies in distressed industries would not get side-tracked by litigation.” where a merger makes sense and you have creditors or shareholders who are either recalcitrant or are simply unable to give the requisite Less than two months after the to $175 million by 2015,” said Jones. consents.” ¤ Chapter 11 filings, the companies “Second, extensions to the debt terms emerged from bankruptcy and the to all silos will provide us more time merger was consummated on April for our transformation. Third, the tax Reprinted with permission of Beard Group © 2014. Turnarounds & Workouts 30, 2013. The combined company aspects and construct of the deal will Trends is published by Beard Group, is Dex Media, Inc. and its common allow the company to maintain and P.O. Box 40915, Washington, D.C. stock began trading May 1, 2013 on take advantage of its tax attributes 20016 Telephone: (240) 629-3300. the NASDAQ stock exchange under and assets.” .