R.H. Donnelley, Dex Media pay down $830 million of debt in '05, see more debt reduction ahead

By Paul Deckelman

New York, Feb. 23 - R.H. Donnelley Corp. and Dex Media Inc. collectively paid down $830 million of debt last year - and now that the two telephone directory publishers have been combined into one company, they anticipate still further reductions to their consolidated $10.6 billion of debt ahead.

The newly merged company's chairman and chief executive officer, David C. Swanson, told analysts on a conference call Thursday following the release of the companies' 2005 fourth-quarter and full-year results that the Cary, N.C.-based Donnelley - the surviving entity following the merger - has a "solid financial profile," characterized by "stable revenues, with extraordinarily high conversion into free cash flow."

And chief financial officer Steven M. Blondy said that "we plan to apply all free cash flow to debt retirement in 2006."

Blondy outlined the company's strategy of "deliver [on financial performance goals] and de-lever."

"The consistent and measurable ROI [return on investment] we deliver to our advertisers continues to support strong and visible recurring revenue and free cash flow," which will allow the company to de-lever and improve the value of the company, the CFO said.

He said that the company expects advertising sales, and revenues, of about $2.6 billion in 2006, with EBITDA margins in the 53%-to-54% range before accounting adjustments mandated by FAS 123, reflecting the two companies' combined operations and year-one costs to achieve synergies.

$700 million free cash flow eyed

Blondy projected 2006 free cash flow - cash flow from operations less capex - of more than $700 million after deducting $75 million of capital expenditures. As of Jan. 31 - the date on which Donnelley's acquisition of Dex officially closed, the combined outstanding net debt for the two companies - total debt less cash and cash-equivalent short-term investments - was below $10.6 billion. Some 78% of its debt was fixed rate, and thus not subject to currently rising interest rates, and 22% was variable rate. The weighted average interest rate on the borrowings was 7.8% before deferred financing cost amortization.

As for 2005, since Donnelley's acquisition of Englewood. Colo.-based Dex in a cash-and-stock deal valued at $9.5 billion including debt assumption was not completed until the end of January, Swanson and Blondy took the unusual approach of discussing each company's fourth-quarter and 2005 full-year results on the conference call.

Donnelley 2005 results

For the full year, Donnelley generated cash flow from operations of $392.1 million. Its free cash flow for the year - that is, cash flow from operations less $31.6 million of capex and software investment - totaled $360.5 million. It had a 6.8% weighted average interest rate on its borrowings, and $265 million of interest expense, including a $25 million tender premium from the retirement of the company's 8 7/8% senior notes due 2010, and $24 million of non-cash deferred financing cost amortization. As of the end of the quarter and the year on Dec. 31, 2005, Donnelley had outstanding net debt of $3.071 billion.

Donnelley repaid $348.5 million of debt during the year, including $317.1 million of the 8 7/8% notes, or 97.6% of the outstanding $325 million principal amount, which were taken out via a tender offer that concluded in December.

Donnelley also sold $300 million of new 6 7/8% holding company senior notes due 2013 in January 2005.

Dex Media 2005 results

Dex Media generated full-year cash flow from operations of $570.4 million, and, deducting from that $37.2 million of capex and software investment, ended the year with free cash flow of $533.2 million. Dex had a weighted average interest rate of 7.8% and total 2005 interest expenses of $446 million, including $37 million of deferred financing cost amortization and $49 million of accretion on the company's 9% senior discount notes.

Dex had net debt as of Dec. 31 of $5.29 billion, and repaid $483.1 million of debt during 2005, including $222.1 million of bank debt, net of revolver borrowings, paid in the first half of the year - about $131 million in the first quarter and $91.4 million in the second - and another $132.8 million during the third quarter, all out of free cash flow.

In June, Dex repriced its bank debt on more favorable terms - some $1.1 billion total of revolving credit facilities and term loans A of its Dex Media East LLC and Dex Media West LLC subsidiaries. The new terms granted by the lenders called for a rate of Libor plus 125 basis points with a possible step down to Libor plus 87.5 bps, based on total leverage. Those terms superseded the original terms of Libor plus 175 bps for Dex East and Libor plus 200 bps for Dex West.

Dex also paid out $54.1 million of cash dividends to common shareholders last year.

Donnelley used a combination of new bank loan financing and bonds to fund the Dex acquisition. In December, Donnelley entered into agreements for $803 million of new term-loan debt, consisting of a $503 million term loan B add-on debt under the existing Dex West facility, which priced at Libor plus 175 bps, consistent with the existing term loan B pricing, plus $300 million of term loan A debt at Donnelley, which priced at Libor plus 150 bps.

January debt added

Then in January - and thus, it is not reflected in the year-end debt figures for the two companies - Donnelley sold notes having a total face value of $2.235 billion - or combined proceeds slightly more than $2.142 billion - in a complex three-part offering of seven- and 10-year senior notes and senior discount notes.

It priced $1.21 billion of 8 7/8% senior notes due 2016, as well as two tranches of 6 7/8% senior discount notes due 2013. The discount notes, carrying identical terms, were broken up into two tranches, one for $365 million face amount ($332,080,650 of proceeds) and the other for $660 million face amount ($600,474,600 proceeds), due to the different uses the company planned to make of the proceeds of the two tranches.

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