It makes sense for Telstra to step on some assets for Sensis

After years of generating annual EBITDA of $1 billion, revenue at the directories business has started to shrink. Revenue for Yellow, the largest part of the business, declined 4.4 per cent while White Pages was flat.

This is disturbing as Sensis has been one of the quiet achievers of the global directories industry. It is the largest advertising business in Australia (edging out News Ltd by a short half head), and, in taking 13? in every advertising dollar, is the world's most entrenched directories operation.

Unfortunately for shareholders Telstra failed to milk maximum value from Sensis, clinging on to the rivers of gold despite the opportunity to cash in at an inflated price. Directories businesses were highly sought after by private equity for most of the last decade. Seemingly blind to the threat the internet posed, a Canadian pension fund set the high water mark for the sector in 2007, paying close to 14 times EBITDA to buy the New Zealand yellow pages.

Those heady days have passed. Listed directories companies in Europe now trade on EBITDA multiples of about 7.5, and several over-geared businesses owned by private equity are coming back on to the market in processes effectively controlled by their lenders. The plight of these international counterparts, with earnings down sharply on pre-financial crisis highs, puts Sensis' modest revenue decline into context.

Telstra is the only major telco globally to keep hold of directories through the sector pricing bubble. With hindsight, that decision looks to have cost shareholders about $5 billion.

Although it missed the opportunity to exit at a premium, Telstra still has choices. Directories businesses up for sale over the next year may attract little demand as there is a dearth of well-capitalised listed directories players, and private equity is unlikely to play in the sector again.

Sensis may have another chance to shine if it can buy assets cheaply and successfully manage advertiser migration to online and mobile platforms. By rights, the Sensis team should be running the ruler over a host of opportunities.

But will the Telstra board be prepared to deploy additional capital in the directories sector? While Sensis has delivered steadily to date, the business contributes only around a 10th of Telstra's profits. At a time when Telstra is grappling with revenue declines across several business lines, board support for a major directories acquisition may be hard to achieve.

It is exactly this situation where a demerger makes sense. Having missed the opportunity to cash out at the top of the market, Telstra must ensure that it capitalises on attractive opportunities thrown up at the bottom of the cycle.

NAB branches bud

REPORTS from Britain suggest six parties, including National Australia Bank, are in the running for the 300 English and Welsh bank branches Royal Bank of Scotland is offloading. A detailed information memorandum will be distributed later this month to a field believed to include private equity (Blackstone, JC Flowers and Resolution) and finance companies (NAB, Santander and Virgin Money).

NAB's interest comes despite earlier speculation that chief executive Cameron Clyne is lukewarm about strengthening the bank's Clydesdale franchise through acquisition. Clyne previously left open the possibility of exiting the market entirely.

Buying the network would more than double Clydesdale's retail market share to 4 per cent, its share of small to mid-sized business to 10 per cent and increase its assets by a third, to about #70 billion ($A125billion).

Confused message

Matthew Quinn may have hoped that glossing over his plans for strategic stakes in three listed rivals at the Stockland results briefing would quell speculation that sector consolidation was imminent. If so, some in the market did not receive Quinn's message.

Stockland's 13.1 per cent holding in GPT dominates attention because Quinn has made a play for GPT twice before and because the stake is held through a derivative structure, previously due to expire in May 2010 but recently extended for 12 months.

Quinn would have appreciated the interpretation of the analysts from UBS, who took his guidance on Stockland's target range for passive earnings as "almost akin to closing the door on a full bid for GPT".