|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|
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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
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