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CORRECTED: Yellow-Pages plot high tech road out of bankruptcy

Corrects 14th paragraph to show R.H. Donnelley supplies content for and does not operate YellowPages.com

By Emily Chasan

NEW YORK (Reuters) - When U.S. yellow-pages publishers Idearc Inc <IDARQ.PK> and R.H. Donnelley Corp <RHDCQ.OB> filed for bankruptcy this year some thought it would not be long before phonebooks disappeared.

But now the two are preparing to emerge from court protection, and their high-tech plans to transform their businesses could be the biggest thing to happen to the industry since the color yellow.

"People relate to us as a product company -- the yellow-pages -- but we don't get paid by people who use the yellow-pages, we get paid by small businesses for helping them create ad messages, build websites, and show up in search engine results," said David Swanson, chief executive of R.H. Donnelley.

We are the conduit between this merchant in Mansfield, Ohio, and a consumer who starts a search online for a landscaper in Mansfield, Ohio," Swanson said.

When the U.S. recession hit, the yellow-pages were crushed by a prolonged decline in advertising spending and a simultaneous drop in the use of print directories, generally. Both companies had trouble meeting payments on their debt.

Idearc, which was spun off from Verizon <VZ.N> in 2006 was left with about $9.1 billion of debt from the deal. R.H. Donnelley, was similarly debt-laden, having pursued a strategy of acquisitions from 2003 to 2007. Idearc filed for bankruptcy in March and R.H. Donnelley followed in May.

But the two have moved through bankruptcy quickly. Each plans to shed some $6 billion in debt from their balance sheets, and continue restructuring their businesses to fit a blended model of Internet and print advertising.

A U.S. bankruptcy judge in Dallas said this week that Idearc's reorganization plan would be approved, allowing the company to emerge from bankruptcy by year-end. R.H. Donnelley plans to put its reorganization plan in front of a judge in January, and hopes to be out of bankruptcy soon after. R.H. Donnelley had support for its plan from the majority of its bondholders prior to filing for bankruptcy.

The firms are also attracting interest from big-name investors. John Paulson, the billionaire investor and founder of hedge fund Paulson & Co, is also betting he can make money on the yellow-pages transition.

Under Idearc's reorganization deal, Paulson & Co will own nearly half the company when it emerges from bankruptcy and be able to nominate a director to serve on its board.

"There are two kinds of companies in the world: those that change and those that go out of business," Idearc's Chief Executive Scott Klein said. "Clearly, we're focused on the former, not the latter."

"We've really transformed from being a division of a telephone company... Our focus is on becoming the ad agency for small and medium businesses in America," he added.

LOCAL SEARCH

Idearc said that in 2008, consumers conducted more than 23 billion searches on its SuperPages.com network. It also distributes its clients advertisements to 250 Internet websites, and even posts customer restaurant reviews from Facebook on its website for local advertisers.

R.H. Donnelley says it lists 11.5 million businesses online through its dexknows.com website and also supplies content for YellowPages.com.

The companies have deals with search engines like Google <GOOG.O> and Yahoo <YHOO.O>, and link up their ads with services like Google Maps or Microsoft's <MSFT.O> Map Point.

"Most of the time today, you are not even realizing that you are interacting with us," said Swanson.

R.H. Donnelley is moving into online video advertising and also general "reputation management" for small businesses that don't know how to respond effectively to negative customer reviews online, he said.

Idearc is making similar pushes, under one program offering a guarantee of up to $500 for consumers who use businesses they found through its website and fail to get the expected results. The company also started a national online network allowing its clients to barter for excess goods and services amongst each other -- so a hotel owner can trade a one-night stay for maintenance of their sprinkler system.

"It's still really tough out there for main street businesses -- they clearly are not participating in the rally that Wall Street has had," said R.H. Donnelley's Swanson. "But my outlook is very positive. This economy is going to get better and small businesses are going to grow again."

Both companies say the yellow-pages are not going anywhere. Idearc's Klein said that consumers still conduct billions of searches in print phonebooks each year, and about half the households in the United States use the phone book 60 times per year, according to industry data. Sometimes, it's just faster to pick up the book, Klein said.

"When Mom's in the kitchen and needs to find an electrician, it's unlikely she wants to go to her son's bedroom and power up his computer," Klein said.

Both companies' current shares are expected to be canceled when they emerge from bankruptcy.

The cases are In re: R.H. Donnelley Corp, U.S. Bankruptcy Court, District of Delaware, No. 09-11833 and In re: Idearc Inc, U.S. Bankruptcy Court, Northern District of Texas, No. 09-31828.

(Reporting by Emily Chasan, editing by Leslie Gevirtz)

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