Lewis: Dial B for bankruptcy

Posted: 06/03/2009 01:00:00 AM MDT

R.H. Donnelley acquired Aurora-based Dex Media in 2006.

OK. So your employer just filed bankruptcy.

What do you tell friends and family about this « embarrassing » chapter in your career?

Dave Swanson, chief executive officer of Cary, N.C., Yellow Pages publisher R.H. Donnelley, says blame the economy.

« This is a bit of a shock, » Swanson, 54, told his employees in a conference call on Friday as his debt-bloated company filed Chapter 11. « I’ll be the first to admit this is something that I never thought we would be faced with. »

Swanson, you see, just loves dumping phonebooks on everyone’s doorsteps, like loads of bricks, each year. He’s long had an Internet strategy, too.

So Swanson led a leveraged buyout spree, acquiring six phone book companies, including Aurora-based Dex Media in 2006. This loaded R.H. Donnelley’s balance sheets with more than $10 billion in debt.

Today, all those phone book companies are worth a sliver of what Swanson paid for them. So R.H. Donnelley is stiffing its creditors and bondholders in bankruptcy court, hoping to ditch about $6.4 billion in debt and $500 million in annual interest expenses.

« I realize that this is going to be awkward, » Swanson told his employees, « and it’s embarrassing, a bit, for all of us.

« Your friends, your neighbors, your family members, » he said, will be « coming up to you with that kind of empathetic look and the cock of head saying, ‘Geez, you know, I’m sorry.’ And they’re going to ask you, ‘Are you doing OK?’

« My suggestion is to simply say, ‘Thanks for your concern. Everything is fine. The company, while down a bit from the economy, just like everywhere else, is still very profitable, making money and doing fine.' »

Um, actually, R.H. Donnelley reported a $401.2 million net loss for the first quarter of this year, and a nearly $2.3 billion net loss for last year – but you know how those pesky accountants can be about impairment charges.

« This is nothing more than a financial exercise to restructure the debt that had been accumulated as a result of the many acquisitions that the company made, » Swanson explained to his employees, « and it’s nothing to be concerned about. »

R.H. Donnelley still has $300 million in cash, plus continuing cash flow from operations. It does not need debtor-in-possession financing because it didn’t wait until it was completely desperate to file bankruptcy.

« We were not forced into bankruptcy, » Swanson told employees. « This is something that we have proactively pursued to avoid an issue with our lenders that was likely to occur in 2010.

« It gives us the flexibility to deal with one of the worst local economies in U.S. history, and the ability to continue to execute on our strategic plan. »

And the good news is that if you are one of the 3,800 employees still working at R.H. Donnelley, you’ve already survived several rounds of layoffs, so stop worrying and get back to work.

« Somebody said it earlier that they believe people are our most important asset. I can assure you that that sentiment is shared by this office as well, » Swanson said.

« Sales and marketing must work hard to return our company to sales growth

« Our customers are counting on us more than ever right now to deliver the leads that are the key to their own survival. It would be an absolute shame to lose that momentum because we allowed this financial exercise to be a distraction

« We didn’t cause the economy to fall into crisis, » Swanson said. « We didn’t cause our local customers to go out of business or stop marketing, or to slow down and stop paying their bills. »

Does Swanson seriously believe that this financial calamity is all just the economy’s fault and not his?

Swanson, who was good enough to take my phone call on Monday, told me that as his company pursued its largest acquisition – Dex in 2006 – it modeled 5 percent annual downturns in ad sales for five consecutive years.

« That had never occurred in our company in 123 years, » he said. « We thought we would survive that. »

Yet now he’s looking at 20 percent declines.

« We anticipated some normal business cycles, » he said. « Nobody anticipated something like this. »

Swanson was paid more than $8.7 million last year, $9.5 million in 2007, and $7.1 million in 2006, much of it in equity-based compensation, and much of it for making a $10 billion bet that went bad.

« I have lost an enormous amount of personal wealth over all of this, » he said.

Would he have done anything differently knowing then what he knows now?

« We would have paid less for acquisitions, and used more stock than cash, but we don’t get the benefit of 2-0/20 hindsight. »

He does get the benefit of being the CEO of a Yellow Pages publisher, though.

Perhaps all he had to do after his buying spree was turn to « B » for bankruptcy attorneys.

Al Lewis: 201-938-5266 or al.lewis@dowjones.com. Read Al’s blog at tellittoal.com

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