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Donnelley to buy rival Dex Media

R.H. Donnelley Corp. said Monday it is buying its larger rival Dex Media Inc. for $4.2 billion, creating the country’s third-largest yellow pages company.
/ Source: The Associated Press

R.H. Donnelley Corp. said Monday it is buying its larger rival Dex Media Inc. for $4.2 billion, creating the country’s third-largest yellow pages company.

The deal creates a major player in the increasingly consolidating yellow pages industry, which despite emerging threats from Google Inc. and Yahoo Inc. remains a highly profitable business that has attracted investors from big private equity firms.

The new company, which will keep the R.H. Donnelley name and be based in Cary, N.C., will operate more than 600 directories in 28 states. Donnelley currently publishes directories under the Sprint name, while Dex is the official directory publisher for Qwest Communications International Inc.

Charles Laughlin of the Princeton, N.J.-based Kelsey Group, a research firm, said the combination was a good one because the two companies don’t share many markets or the same business model.

“They have different cultures to some degree,” he said. “Dex is known as a leader in the development of online business and marketing while RHD is good at blocking and tackling — they know how to sell.”

While the company won’t be the market leader, it will gain more bargaining power in future negotiations with search engines such as Google or Yahoo, Laughlin said.

Under the agreement, Donnelley will pay $12.30 in cash and 0.24154 of a share for each share of Dex, or a total of $1.85 billion in cash and 36.4 million shares of stock. Shareholders of Donnelley and Dex will own 47 percent and 53 percent of the combined company, respectively.

“Our two companies fit together extremely well in our geographies, cultures and competencies,” David Swanson, R.H. Donnelley’s chief executive, told analysts during a conference call after the deal was announced.

Swanson will be CEO of the new company, while George Burnett, CEO of Colorado-based Dex Media, will be chairman of the board.

The executives said the merger will create economies of scale and give the larger company more negotiating power with online portals and search engines. Yellow pages publishers have been looking at the Internet to increase revenue.

While less glamorous than other forms of media, yellow pages is still one of the most profitable. Consumers use them less frequently than they did before the Internet arrived, but the decline has leveled off in recent years.

Small businesses still advertise in them, knowing that many consumers look in the yellow pages for a vendor when they’re just about to buy something.

A spokeswoman for Dex Media said there are concerns about the jobs of some 1,100 workers in Colorado, including about 1,000 in the Denver area.

“We do expect some staff reductions (in Colorado) but it’s far too early to tell what the impact will be at this point,” Dex Media spokeswoman Pat Nichols said. “We will continue to maintain a sizable employee presence in Denver and in Colorado.”

Donnelley has about 2,000 employees, including several hundred near its North Carolina headquarters.

Donnelley will also assume Dex’s $5.3 billion in debt, giving the combined company a total of $10.68 billion in debt. JPMorgan Securities has committed to $10.4 billion in financing for existing debt.

Subject to shareholder and regulatory approval, the companies expect the deal to close in early 2006.

In a joint statement, the two companies said the merger should generate annual cost savings of $50 million by 2008, with most of the savings coming from eliminating redundant computer systems and other administrative functions.

Private-equity firms Carlyle Group and Welsh, Carson, Anderson & Stowe control a total of 52 percent of Dex shares, and have voted their shares supporting the transaction. Each firm will appoint one member to Dex’s pool of board members.

Investors did not appear to be sold on the deal.