|Shares Out. (in M):||208||P/E||NA||7.0x|
|Market Cap (in M):||666||P/FCF||NA||5.7x|
|Net Debt (in M):||2,104||EBIT||221||208|
Cincinnati Bell Inc. is a full-service regional provider of data and voice communications services over wireline and wireless networks, a full-service international provider of data center colocation and related managed services, and a reseller of information technology and telephony equipment. The Company provides telecommunications service to businesses and consumers in the Greater Cincinnati and Dayton, Ohio areas primarily on its owned wireline and wireless networks. The Company also provides business customers with outsourced data center colocation operations in world-class, state-of-the-art data center facilities, located in the Midwest, Texas, England and Singapore. In connection with the data center colocation operations in the Midwest, the Company also provides business customers with a full range of managed IT solutions.
Current Situation & Recent History
- Most wireless providers are national or are affiliates of national wireless providers
- Both Wireline and Wireless Revenues have been declining
- Data Centers are a high growth, high margin business and a natural fit for a telecom operator like CBB
- Revenues have grown at CyrusOne from $41 million in 2009 to $249 million LTM
- Since the value of its data center business was not being reflected in CBB’s stock price, CBB elected to IPO this business (Cyrusone – ticker CONE)
- Additionally, CBB has recently invested in FiOptics (like Verizon's FiOS), that provides video and high speed internet to consumers
- CBB hit a high in early October of $5.89 a share and was trading above $5.5 a week before the IPO
- Ever since the IPO of CONE, investors have rushed for the exits
- As a result the stock dropped 30% subsequent to its earnings release, as investors still caught in the CONE trade were now forced to sell
- The fastest way to accomplish both is through a split up of the entire company.
- Company has already announced its intentions to sell off its stake in CONE (although they have a 1 year lock which expires in January 2014), and its wireless business
- Wireline revenues are expected to strengthen as revenues for Data & Entertainment (which have been growing) has now surpassed revenues for voice and has become the largest source of revenue for the company.
- Unleveraged free cash flow in the wireline business is expected to be approximately $173 million in 2013 and $186 million in 2014
- The main reason for underperformance of the wireless business is CBB's lack of a national presence and cost of subsidies
- Company has stated that their wireless asset is much more valuable in the hands of a national wireless provider, especially because of the synergies that it can provide
- Wireless - Wireless comps (USM, LEAP, TMUS, NTLS & S) trade on average at 7.0x E. 2013 EBITDA. However, none of these comparables have any real FCF to merit a FCF multiple.
- CyrusOne - as stated earlier CBB’s ownership of CONE is currently valued publicly at $980 million
- Wireline & IT - ILEC's (CTL, WIN, FTR, HCOM & CNSL) trade at 5.5x 2013 EBITDA which results in a Enterprise Valuation of $1.765 billion for the wireline business
- Additionally, there is corporate expense of $26 million, using a 5.6x multiple, that would equal a decrease in value of $142 million
- All together, the value of the segments are worth $3.09 billion which is a $983 million of equity value
- The resulting valuation would result in a stock price of $3.98 or 26% higher than today
- Before $50 million the one-time CAPEX associated with the buildout of Fioptics, and assuming that CBB uses proceeds from CONE to pay down 8.375% Senior Bonds and they refinance their 8.75% sub bonds at 7%, their Pro-Forma free cash flow would equal $132 million in 2014. Comps trade at 7.5x Free Cash Flow (which I think is a low FCF multiple for CBB, since unlike their comps, they will be growing both revenues and free cash flow) which would equal a $992 million equity valuation, which would equal $4.77 a share or 50% higher than today
- Comps trade at 20x 2014 Earnings. Assuming paydown of senior debt with proceeds from CONE and the refinancing of the sub debt, CBB should earn $95 million in 2014, or $0.46 a share (fully taxed – which is an aggressive assumption since they will still have a large NOL left even after selling their CONE stake) which would equal $9.18 a share for CBB. Even using the lowest comp of 15.2x earnings would yield a price of $6.97 a share which is 120% higher than today
- Resolution regarding wireless business - as stated earlier, the company is actively looking to sell its wireless business. This business has been in decline and a sale coupled with a paydown of high coupon bonds will immediately add comfort and value to the company. Even an announcement that they are no longer selling the business, which may be a momentary negative, would help investors start thinking about CBB as a wireline pure play. A resolution is expected by release of year end numbers
- Refinancing / Paydown of high coupon senior and sub debt
- Improvements & growth in its wireline business.
- Free Cash Flow and Dividends
- Additional upside:
- These investors were not in for the “long haul” and are not interested in the long term growth prospects of the company
- Classic Wireline (ILEC) investors are not interested because CBB does not pay dividends
- Wireless investors are not interested since wireless is such a small part of the business and there is no national presence
- Value of CyrusOne are too small relative to the rest of the Company to garner interest from high growth investors and they have announced their intention to exit their stake in CONE
- CAPEX and other one-time cash expenses will casue the company to BURN cash in 2013. However, it is expected that the company will grow and deliver free cash flow to investors in 2014
- Unlike CBB, most wireline companies are not growing revenues and therefore they are not the focus of most investors.
Risks – What Can Go Wrong? (Level of Impact – Small/Medium/Large; % Likelihood)
- While failure to sell the entire business would be disappointing, there is much value to the Assets” of this business. The loss associated with the operating business could mean a loss of 50 cents to the stock
- Valuation of business is already conservative and asset value provides a nice floor
- Every $1 change in the price of CONE causes a $0.21 change in the value of CBB stock
- This risk can be easily hedged out
- This is the main growth driver of the company and setbacks in this area will cause value to dissipate
- Company has been highly successful thus far in it roll out
- This is the main near term catalyst, but is significant, especially since wireless has been the biggest drag on fundamentals
- Now that T-Mobile (the most logical purchaser) has completed its merger with PCS, it is likely that the wireless business will be sold soon
- Through the sale of its wireless business and further sale of its shares in CONE, the company will pay down debt and radically improve its credit profile, allowing the company to refinance at much lower interest rates and improve free cash flow generation
- The inflection point is expected to occur in the 3rd or 4th quarter of 2013 where the growth generated from Fioptics and buildout of metro fiber overtakes the revenue loss from the slowing of the legacy telephone business
|Entry||11/30/2013 06:29 PM|
This is the paragraph from the latest 10Q:
CyrusOne Inc. is a real estate investment trust, or REIT, and the sole beneficial owner and sole trustee of CyrusOne GP, which is the sole general partner of CyrusOne LP. As of September 30, 2013, CyrusOne Inc. owned approximately 34.2% of the operating partnership units in CyrusOne LP. The remaining approximately 65.8% of the operating partnership units in CyrusOne LP, which is reflected as a noncontrolling interest, is owned by our former parent, Cincinnati Bell Inc. (“CBI”). As the sole beneficial owner and sole trustee of CyrusOne GP, which is the sole general partner of CyrusOne LP, CyrusOne Inc. has the full, exclusive and complete responsibility for the operating partnership's day-to-day management and control.
In the earning presentations of CBB they show that they own 44,476,835 shares of CONE as of the latest close CONE was 20.43 which equals $908 million (when i put together the original writeup, CONE was a little higher)
|Entry||06/18/2014 10:13 AM|
Some important recent announcement froms CBB
1) in 1Q they reported that for the first time in 10 years they grew both Revenue and EBITDA in their wireless business
2) announced the sale of their wireless business to Verizon for $194 million, which should close in the 3Q
3) Acceleration of their Fioptics rollout due to the TWC/Comcast merger - TWC is the cable provider and as a result of the merger, their subscribers in Cinci will be put into the Spinco that will be owned by Comcast and Charter. CBB feels that they have a huge opportunity here because these subscribers are now in flux and they probably can steal a lot of subs
4) Today they announced the sale of a portion of their stake in CONE - they are looking to sell 12.5 million shares @22 = $275 million. CBB has not yet announced exactly what it will do with the proceeds, but 85% of it ($234 million) will be used to call their 8.75% sub bonds and i think that they will use the remaining 15% (41 million or $0.197 a share of CBB) to buy back CBB stock.
After CBB completes the CONE & Wireless transactions they will deleverage over 1.0x, with interest expense dropping from $154 million to $118.5 million. Pro-Forma for the transactions, CBB will be generating $340 million of EBITDA. CAPEX will be elevated this year at $185 million, but will drop after the accelerated Fioptics buildout to to around $120 million. Assuming $40 million of Pension Expense (and no taxes due to the large NOL). CBB should be generating around $90 million of Free cash flow at 8.5x (that is where non-growing Telco comps trade - i personally think they should trade at a premium) = $765 million of Equity Value. Add thier remaining shares of CONE @ $22 = another $700 million of equity value for a total of $1.465 billion. Subtract out the value of their Preferred and that leaves a value of over $6 a share in the stock. I believe that that target still has upside, as CBB will be a growing Telco (really a cable & fiber company) and should therefore deserve a premium multiple. Additionally, there is more upside to free cash flow by just refinancing some of their remaining debt after the aforementioned transaction.