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Deciphering the future of Cincinnati Bell

Cincinnati Enquirer | Tuesday, 5 July 2016


Deciphering the future of Cincinnati Bell

Fatima Hussein and Alexander Coolidge

Debt is down, subscribers are up and profitability is steady at Cincinnati Bell.

As Cincinnati Bell moves further away from its Broadwingera past, investors are more prone to discuss something they haven’t before: the company’s future.

Nearly crippled at the turn-of-the-Millennium by almost $3 billion in debt from the company’s misadventures during late 1990s telecom bubble, Cincinnati Bell has paid off much of that lingering bill with proceeds from spinning off its former data subsidiary CyrusOne into a separate company.

Cincinnati Bell executives now are positioning the company’s stock to attract broader interest by institutional investors with a pending reverse stock split. But the Downtown- based company has also attracted other investor attention with some analyst speculation appearing in Barron’s it might now be a tempting takeover target – chatter that recently prompted its stock to jump in value.

Shares jumped to a $4.63 on June 23 – a high not seen since 2012 – on the industry buzz.

Companies acquiring similarsized telecom players have paid a median multiple of 10 times annual cash flow for the 11 takeovers done

Cincinnati Bell executives are positioning the company’s stock to attract institutional investors with a pending reverse stock split.
Ted Torbeck


in the last three years, according to Bloomberg data. If Cincinnati Bell were for sale and acquired at that price, the company would be gobbled up in a roughly $4 billion transaction and shareholders would reap more than $12 per share.

But there’s no sign that any such transaction is in the works.

Analysts say Cincinnati Bell’s future might include modest acquisitions of its own.

Speaking with The Enquirer, CEO Ted Torbeck was clearly happy to see wider interest in his company, but also dutifully downplayed the chatter as “speculation.”

He shared his take that he previously provided internally to employees.

“I told our employees that we can’t control speculation,” Torbeck said.

“Beyond the normal conjecture, I told our employees that the Barron’s piece means the terrific work they’re doing is appreciated by our investors. The Gabelli write-up simply highlights that our ongoing investment in fiber; the strong performance of our IT services business; our Out-of-Territory expansion efforts; and our successful debt-reduction efforts make us an increasingly attractive company.”

New possibilities for a 140-year-old company

The last existing regional Bell telecom, Cincinnati Bell’s legacy business is steadily fading into history as households and businesses shut off landline phone lines in favor of mobile service. To replace that lostrevenue, the company has transformed into a data mover and an entertainment and internet service provider through its increasing deployment of fiber cable.

Cincinnati Bell has been able to concentrate on its transformation for years without noisy interruptions concerning potential buyouts because it was mired in so much debt. The company was not an attractive takeover target; anybody who would have taken them over would have gotten a

Nick Hoyes of Cincinnnati Bell connects fiber optics service to a home in Morgan Township. Cincinnati Bell has transformed into a data mover and an entertainment and internet service provider through its increasing deployment of fiber cable.


company generating $1 billion in annual revenue with nearly $3 billion in debt.

But the successful 2013 spin-off of CyrusOne has changed that. Cincinnati Bell has steadily sold off its stake in its former subsidiary and paid its debt down.

Gabelli analyst Sergey Dluzhevskiy wrote a note shared in June with Barron’s that Cincinnati Bell was “a more attractive acquisition candidate” – tripping the spike in the stock price. Torbeck said Cincinnati Bell is focusing growing its other businesses as its legacy local telephone voice service continues to wane. Local voice service generated $520 million, or 45 percent of company revenue in 2004. Last year, it was $292 million, or less than 25 percent of revenue.

“Identifying where we go from here is our top priority,” Torbeck said. “We are still in the early innings of evaluating all of our options – so any specific ideas would be premature.”

He didn’t rule out Cincinnati Bell making an acquisition.

“All of our recent success provides

Cincinnnati Bell fiber optic cables run from a utility pole in Morgan Township.


increased opportunity to further invest in strategic initiatives like the fiber build, and our IT Services Business, which is growing revenue more than 20 percent annually,” Torbeck said. “We continue to see more and more opportunities to invest in areas that provide attractive returns to our shareholders. Any acquisition we would consider would most likely involve expanding into contiguous geographies to capitalize on growing demand for fiber-based products and IT solutions.”

A brighter future ahead

Cincinnati Bell’s future is brighter regardless of whether it entertains possibly being acquired or continuing as an independent company with growing new businesses.

Terry Kelly, principal at Bartlett & Co., Downtown, said from his point of view, considering Cincinnati Bell’s recent reverse stock split plan, “company management at Cincinnati Bell is positioning themselves to expand.”

A one-for-five reverse split would reduce Cincinnati Bell’s 210 million shares outstanding to about 42 million shares. The move is designed to increase the per-share value from $4.50 at Friday’s close to more than $20 per share.

While a mechanical change, it would allow more institutional investors to buy Cincinnati Bell shares. Some institutions have internal rules against or generally don’t consider investments in stocks that trade for less than $5 per share.

More potential buyers of company stock could create more demand for the shares, which would increase the stock price further.

Dluzhevskiy’s note did not predict an acquisition and also suggested Cincinnati Bell might make acquisitions. He predicted if Cincinnati Bell remained an independent company, its stock value would gradually rise to $6.85 by 2020.

Dluzhevskiy predicted Cincinnati Bell would eventually sell off its remaining $200 million worth of CyrusOne stock. He also said the company would begin to wrap up its ongoing expansion of its Cincinnati fiber network by next year and free up cash to make acquisitions or repurchase stock.

Bartlett’s Kelly agreed Cincinnati Bell might make some acquisitions to further boost growth. But given the company’s long battle to free itself from debt, he predicted any future acquisitions would be “bite-size” deals.

“I believe the likelihood a large acquisition that would add back $1 billion in debt is very low,” Kelly said.

Kelly said Cincinnati Bell appears to want to continue growing on its own, but one couldn’t rule it selling itself.

“It seems to me if someone came in at the right price, they’d be willing to listen,” Kelly said. Of such regional companies, he said, “whether it’s cable or internet companies, it seems to be they converging into big players.”

Dluzhevskiy predicted any Cincinnati Bell acquisitions would be ones aimed at powering growth behind “managed services/IT solutions and fiber in adjacent markets.”

The possibility of being acquired

Dluzhevskiy wrote that “potential acquirers may include telecom service providers with presence in Ohio and/or interested in expanding their scale through purchase of fiber-rich wireline properties (e.g., Frontier Communications, Consolidated Communications Holdings, communications groups comfortable owning both cable and telecom assets (e.g., Altice ) and private equity.”

And there is a possibility that Frontier, the country’s third-largest fiber provider, could be interested in taking over.

The company recently completed its biggest acquisition ever, just last April, with the purchase of Verizon Wireless’ wireline holdings in California, Florida and Texas, for $10.5 billion, adding 3.3 million voice and 2.2 million broadband customers and businesses.

Consolidated Communications Holdings is also strategically purchasing firms, including its latest acquisition in April of 275 fiber route miles of Illinois-based Champaign Telephone Co. for roughly $13 million.

CEO Torbeck made it clear the company is not waiting around for a potential suitor and is developing its future plans.

“As we look ahead, we believe that through our proven business execution, further reductions in debt and eventual buyback of shares, we have several paths available for driving continued shareholder return,” Torbeck said.

A big factor in whether or not the company could be acquired depends on the amount of capital it has to continue its development, said NYU Law professor Christopher Sprigman. Sprigman, whose research focuses on how legal rules affect innovation and the deployment of new technologies, declined to make any specific forecasts regarding Cincinnati Bell.

He said the biggest limitation hindering widespread fiber optic deployment is the cost of implementing new fiber optic lines when old infrastructures like DSL and cable still serve customers. “Overbuilding is very expensive,” he told the Enquirer.

The market is there in Ohio, where there are more than 60 fiber providers, and only 10 percent of the state’s population has access to a fiber optic network.

In Cincinnati, Cincinnati Bell has a goal to build out 70 percent of the region by the end of 2017.

Sprigman said it comes down to whether a firm can compete. “A small firm that has a regional monopoly, and how well you run your business,” determine the success of a firm, Sprigman said.

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