After speculation earlier in the year, Cincinnati Bell Inc. (CBB) has announced that it intends to spin-off its data center colocation division, CyrusOne. This is a potential source of upside because your typical telco, such as Cincinnati Bell, trades at around 0.5-1.5x sales. However, comparable companies to Cyrus One trade at 6x sales. CyrusOne may only represent about 10%-20% of Cincinnati Bell's business, but the IPO could help Cincinnati Bell by crystallizing the value in the fast growing data center colocation business.
Of course, some of this value has already been realized, as this IPO has been rumored for a while, and the stock is up 30% vs. the S&P 500 YTD. In addition, the IT hosting sector may not quite deserve the lofty valuation multiples it is currently getting, but nonetheless further upside for Cincinnati Bell ahead of the IPO seems probable.
Details Of The Spin-Off
CyrusOne provides data center colocation services for large companies; basically this offers economies of scale to its customers. CyrusOne manages the data centers with the efficiency and scale that an individual company that does not specialize fully in IT cannot achieve. CyrusOne's business is relatively US-centric, with predictably its largest presence being in Cincinnati, but it also serves many energy companies and has substantial operations in Texas as a result.
CyrusOne announced in August 2012 that it intends to spin-off at least some of CyrusOne through an IPO and use some of the proceeds to pay down debt.
The most appropriate comps for CyrusOne are Rackspace (RAX) and Equinix (EQIX), both of which are growing fast and trading at high valuations as a result. Of course, other large companies such as Dell (DELL) and IBM (IBM) offer similar services, but it is difficult to separate out hosting from their other businesses.
|Company||P/S (TTM)||P/E||P/B||YoY Rev. growth (mrq)||Market Cap|
Estimated CyrusOne Valuation
|Price to Sales||$203M||5.8x||$1.1B|
Now, the full details of CyrusOne are not available yet, but we know the business has trailing twelve month sales of $203M and ttm adjusted EBITDA of $110M. This excludes any potential incremental costs that occur as a result of being a separate company.
Sum Of The Parts For Cincinnati Bell
|CyrusOne (see above)||$1.1B|
|Cincinnatti Bell excl. Cyrus One (5x 2012 est. EBITDA excl. CyrusOne of $420M)||$2.1B|
|Resulting Equity Value||$1.0B|
|Shares outstanding (diluted)||201.7|
|Value per share||$4.95|
|Upside from current price of $4.50||10%|
Cincinnati Bell's upside of 10% is not stellar when compared with other recent spin-offs , but the catalyst is highly likely given the announcement of the IPO and the stock could trade above this with the positive attention of the roadshow. In addition, my 5x EBITDA multiple for the core business is perhaps fairly conservative. Cincinnati Bell appears a good short-term hold until the IPO for investors who believe in the growth of IT outsourcing or are already holders of peer companies.
- The IPO could be delayed or cancelled if the stock market falls substantially or management alter their plans for some other reason
- CyrusOne is investing for growth and substantial capex means the business is not cashflow positive.
- CyrusOne's revenue growth has been good, but may be slowing slightly. It has been above 4% sequentially quarter-on-quarter for the prior 3 quarters, but was 1.9% last quarter (Q2 2012). Of course, on an annualized basis, growth still exceeds 20%. In addition, center utilization is also down slightly at 85% for Q2 of 2012 vs. 90% in Q2 of 2011. If this slowdown continues it would reduce CyrusOne's valuation, at the moment both these data points are likely more noise than a real signal.
- Barriers to entry are not substantial in data center colocation and many players, in addition to the ones listed above, can compete with CyrusOne. Over time, this is likely to reduce margins.
- In buying into Cincinnati Bell, you are also buying into a mature telco business accounting for the majority of revenue and profits; any upset to that business would obviously hurt the stock price regardless of the CyrusOne IPO.