Two key events are likely to happen in March 2012:
- Yellow will pay a quarterly dividend on its preferreds ($0.265625 on the series 1).
- Yellow will convert the preferreds into common (at a ratio of 25/2 common shares per series 1 preferred share).
At Friday's closing prices, this means that holders of series 1 preferred shares will get a $0.95 profit, or 43%. Link to spreadsheet.
The stock is priced how it is due to concerns about the viability of the business. Yellow took on a mountain on debt during its life as a high flying income trust and continued to pay-out too much cash even after converting to a corporation (the dividend was discontinued in 2011). Investors are concerned about management's ability to complete the transformation from a telephone book maker to an internet/e-media services company.
Can they survive? If its lenders continue to support the business, there seems to be enough cashflow to continue servicing its debt:
- The company made $166mm of EBITDA (51.3% margin) in the three months ending September 30, 2011.
- (LTM EBITDA)/(Interest) was 6.1X, and (net debt)/(LTM EBITDA) was 2.5X.
What do you think of this opportunity?
UPDATE (1/31/2012): long position in preferred shares.