Yellow Media Inc T.YLO

Hello Rock,

I think you post is saying what has gone on with Yellow Media's share price makes very little sense. Although I agree with you in principle, it seems there were other factors at play. Some were emotional and some just the result of bad timing. It seems like the ingredients of a "Perfect Storm" for an organized short attack of exceptional proportions.

Primary Ingredients:

·         The business model for print media in decline. Yea, it will not disaapear anytime soon, but it does create a level of uncertainty, and, if properly played can generate a lot of concern. (many analysts used this concern later to justify their forecasts)

·         There is sufficient uncertainty about the (successful) move to digital advertising to cause concern among investors.

·         A lot of the company's assets are soft assets which could not easily be sold in the event of a liquidation.

·         Debt load was high enough to be of some concern.

·         Dividend policy was high enough to hamper the rate of debt reduction and also attract a lot of income investors.

·         Company management was not particularly forthcoming with public disclosures of information

·         Although there were good business reasons for the divesture of Trader it was playing out like it was a sign of weakness (possibly forced on Yellow by the powerful debt holders) and it was soon linked to the notion of: no Trader sale and Yellow Media will collapse.  

This sounds like a pretty good set of circumstances to start shorting the stock.  According to the reports we have now (thanks Mark) the shorts have been running in 100 - 140 million common shares range since late June and I'd speculate it started long before that.

This is a very high level of shorting in the 20-25% range  so it forced a fairly fast drop in share price. This was followed by lots of buying and selling among the various large scale short players while may retail investors got cold feet and eventually sold with the sentiment that although what's happening doesn't make sense, they just couldn't stay with it and sold - After all the analyst's forecasts were getting worse and worse.

While this is going on we have some other ingredients being added.

·         The CFO sells his shares into the NCIB program (I think the comment at the time was: it smelled bad)

·         There is no buying activity on insider trading from Directors and Officers

·         Analysts are getting concerned about their advice and start a series of downgrades to match the share price drop that is underway even though is little (perhaps nothing) to justify any change except for market behaviour.

This serves to fuel a lack of confidence for investors.

The company is saying very little publically until coaxed to do so by the TSX. It does issue a press release in this regard which essentially says it's business as usual, dividend policy stands, and our common shares do not accurately reflect true value.

As the share price continues to fall more and more retail investors take their lumps and get out.

The Trader sale is delayed fuelling further speculation that it may not happen at all, but it eventually does - but the working capital adjustments show the net proceeds as being lower (even though this was expected but not well understood publically) than what some people expected raising further concern.

Next came the Q2 earning report which included an unusual expense item of $69M resulting in a loss for the quarter. The dividend cut (from 0.65/yr to 0.15/yr) was also announced at this time resulting in a further loss of confidence. So many of the shareholders that were in it for the dividend sold here. This is when the shorting went to approximately 140M Common shares and the share price dropped from the $2 range quickly toward the $1 range.

Next we saw a credit rating downgrade and being dropped from the TSX 60. There was a selloff consequence to this which resulted in a further drop in share price.

We are now seeing talk of bankruptcy (without any convincing evidence) for Yellow Media showing up on this board.

What an exceptional set of sustained circumstances (Perfect Storm) for the folks shorting the stock.

Aside from the News Release announcing the CFO's resignation Yellow Media has remained silent since the Q2 report. The was a positive sign with some significant insider buying in the 0.70 - 0.90 price range. There was also evidence that debt repurchase and share buy back on the preferred shares were underway at significant discounts but there was no progress reporting from Yellow Media directly.

There is a new concern now that dividend yield on the common shares is creeping toward 30% at the current price of 0.61 (market close on Sep 23) and that will raise concerns about sustainability - is the market telling us something we don't know?

So that bring us to today and I guess the question is can this Perfect Storm continue?

The current share prices (common and preferred) do seem to be advantages to Yellow (and its shareholders) for the debt reduction program but that must be getting close to finished by now.

The company seems to have sufficient cash, cash flow and earnings to sustain itself going forward, so it seems doubtful it can be pushed into bankruptcy unless there is a coordinated set of actions by Yellow's creditors to orchestrate some kind of squeeze to force a default.

Maybe it time for the shorts to cover, invest themselves, and ride the wave back up? A fitting close to a Perfect Storm - a Perfect period of fair weather...