- Recent earnings show that wireline and IT solutions revenue is growing, and this bodes well for when it disposes of the wireless segment.
- Its investment in CyrusOne is a hidden gem on its balance sheet.
- Management should consider instituting a dividend and/or distributing CyrusOne shares to shareholders.
Today we will look at Cincinnati Bell (NYSE:CBB) shares and I will offer a case as to why they present a good value for shareholders and prospective investors at the current share price. Based on its investment in CyrusOne, Inc. (NASDAQ:CONE), along with the pending phase-out of its wireless business, the market offers shareholders a discount in its shares right now in my opinion.
For some background information on Cincinnati Bell, it offers wireline services and also high-speed internet along with television service through its Fioptics network. Also, its IT Solutions and hardware division are currently experiencing good growth, which will be discussed in more detail later on in this article.
Exit from Wireless:
Please note that the second quarter 10-Q filed by Cincinnati Bell can be found here. I will be referencing several numbers from this report.
As the notes to the consolidated financial statement indicate, page 16 shows that wireless revenue declined in the second quarter to $41.2 million from $51.7 million in the second quarter of 2013. This is its only segment that lost money. With the cash infusion from Verizon Wireless from this sale of the spectrum, coupled with the eventual wind-down of this business, the company looks to finally be able to be free from this loss leader. Intense competition from larger scale companies have lead management (and rightfully so in my opinion) to determine that it cannot be competitive in that market.
It is not clear what the funds from this sale, which is expected to close in the second half of 2014, will be utilized for.
Cash Infusion from Sale of Spectrum and Sale of CyrusOne Stock:
Cincinnati Bell announced during its most recent second quarter earnings announcement that it had sold 16 million partnership units in CyrusOne for $356 million. This money is earmarked to pay down debt, and the company also announced there that the annual cost savings in interest expense will be $28 million.
With the money coming in soon from the spectrum sale, I believe that Cincinnati Bell has a hidden gem in the remaining stake in CyrusOne, in addition to flexibility as to what to do with this proceeds.
CyrusOne Investment - Hidden Gem:
In the sale of the partnership units, the $356 million amount equated to an average price per share of $22.25. Partnership units are exchangeable on a one-to-one basis for shares of common stock.
CyrusOne trades at $26.04 as of 9/1/2014 and pays a nice dividend of .84 per share per year. In hindsight, had Cincinnati Bell waited, it would have received $60.64 million more by selling them now. Regardless of that, let's take a look at what this investment is worth based on its current share price.
Per the 10-Q notes, as of 6/30/2014 Cincinnati Bell owns 44% of CyrusOne still, and that is comprised of 1.9 million shares of common stock and 26.6 million partnership units. In total, that represents 28.5 million common shares if they were all exchanged. 28.5 million shares at its current price of $26.04 gives this investment a current market value of $742.14 million.
Per Yahoo! Finance's key statistics, there are 209.1 million shares outstanding of Cincinnati Bell. I believe that the company should seriously consider spinning shares off of CyrusOne to Cincinnati Bell shareholders. If it did so, shareholders of Cincinnati Bell would receive .1363 (28.5 million divided by 209.1 million) shares of CyrusOne for each share that they own in Cincinnati Bell. The market value of .1363 shares of CyrusOne is $3.55 per share. The share price of Cincinnati Bell as of 9/1/2014 is only $3.67!
Two Growing Segments Remain for Cincinnati Bell:
There is a huge discount currently being given to purchase shares of Cincinnati Bell for this reason, and once the wireless segment is completely disposed of, it will be left with two growing segments.
Per the 10-Q, the wireline segment revenue grew to $184.7 million of revenue in the second quarter of 2014 compared to $181.6 million for the second quarter of 2013. IT services and hardware grew to $101.6 million from $86 million in this same time frame.
A key area of growth in the wireline segment is the Fioptics entertainment (television) department. Per the earnings announcement, Fioptics video subscribers as of 6/30/2014 totaled 82,500, which is up 31% from the same period a year ago. Getting the programming customers want is a key to driving more of this growth, and it recently signed a distribution deal with ESPN to provide the SEC Network. Another important part of driving growth for this revenue is to continue to provide customers with a quality picture.
In essence, I believe that Cincinnati Bell is underpriced right now because its investment in CyrusOne is almost worth as much as its shares currently are. This pricing does not factor in that the company will be left with two growing segments once the wireless segment is completely disposed of. I view this as a buying opportunity and would recommend the stock.