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Cincinnati Bell Doubles Down On The Bull Case

Vince Martin profile picture
Vince Martin


  • Cincinnati Bell's acquisitions of Hawaiian Telcom and OnX came out of the blue - and on their face seem a bit odd.
  • But the acquisitions do align with CBB's existing business and amount to a leveraged bet on the long-term bull case here.
  • The market didn't like the deal, and it does amplify risk.
  • But it also amplifies reward, making CBB a more leveraged play on the long-term value of fiber and the company's ability to create a legitimate consulting/reselling business.

I don't recall being more stunned by a major move of a company I owned than I was by Cincinnati Bell's (NYSE:CBB) announcement Monday morning that it was acquiring two companies for a total of about $850 million. The bull case for CBB was predicated mostly on a deleveraging/cash-flow-compounding scenario, particularly with capex spend on the company's fiber-optic network in the Cincinnati area expected to taper off towards the end of the decade.

Cincinnati Bell had hinted at some M&A interest and made a small acquisition in February. But that interest seemed limited to growing the company's CBTS IT solutions business - and CBB management spent just as much time highlighting improvements in the company's leverage ratio and discussing the possibility of share repurchases (see, for instance, the Q1 conference call). Add to that the fact that CEO Leigh Fox had taken the top spot only on May 31 (though he was COO prior to being promoted), and such a major move was a significant surprise.

The market didn't appear to like the deal much, sending CBB shares down 7%. And, I'll admit my initial reaction wasn't particularly positive, either. The combination of Cincinnati Bell and Hawaiian Telcom (HCOM) seems an incongruous fit. Existing shareholders are being diluted by roughly 30% at a price of $18.86, a price I (obviously) thought left CBB undervalued to begin with. And, a $200 million acquisition of OnX is a notable expansion of the IT services business - a tough business with smaller margins and one that dilutes the core fiber-based story here.

But looking at the deal more closely, CBB's play makes more sense. In fact, it's essentially a leveraged bet on the existing bull thesis for the stock. And, I think that bull thesis is strong enough to justify that bet - even if it likely adds a bit

This article was written by

Vince Martin profile picture
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.

Analyst’s Disclosure: I am/we are long CBB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This week, I may add to my position in CBB and/or buy shares of HCOM as a backdoor entry.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

Thanks for the article. I have been observing this rapidly consolidating wireline space for a couple years now. Seems to me the larger dividend payers that have been doing the majority of the "consolidating" (and raising their leverage in most instances) have vastly under-performed the smaller wireline telcos who don't pay a dividend and have been concentrating on improving their balance sheets.

Here is the approximate stock price performance in the last 52 weeks of the two groups starting with the larger players:

FTR: -83%
WIN: -60%
CNSL: -33%
CBB: -32%

And now some select non-dividend smaller players that have been deleveraging:

LICT: +102%
OTEL: +73%
ALSK: +24%

Of these, I hold only OTEL. Despite announcing its intention to explore "strategic alternatives" late last year, and a sizeable increase in stock price since then, it is still by far the cheapest of the above mentioned securities ...trading at just 3.9x trailing twelve month EBITDA. Recent deals in this space, CBB/HCOM, CNSL/FRP, etc have been in the range of 6x. If Otelco hypothetically went for a bargain basement 4.5x its stock would be worth over $12/share versus its current $7.50/share price. Further, its credit line was nearing expiration early last year when the high yield market was essentially frozen because of the oil price decline. They were forced to agree to horrible terms, especially considering their leverage is superior to many wirelines. The high yield market has since seen rapidly declining rates so a re-fi is an option if they don't sell.

Good luck with CBB.
Vince Martin profile picture
I'm not sure how much if the split has been balance sheet or business focus - but it's an interesting point.

I'm only vaguely aware of OTEL, to be honest - I'm intrigued by your case though. Micro-cap play, sounds interesting.
Ivan K. Wu profile picture
I've followed the CBB story since 2016 (no position) and it's clear that your original thesis is broken:

1. Both HT and OnX are subpar assets. I'm from Toronto and worked in IT, so I happen to know this about OnX for a fact. Worse than IBM.
2. The deal reduces regional economies of scale and SG&A efficiencies, making CBB a less attractive acquisition target (all else being equal)
3. Management has a track record of throwing money away in pursuit of imaginary "synergies." The only reason the deleveraging opportunity existed was because of a prior disastrous merger with ICX. Old habits die hard it seems.

The argument that this "amplifies" the bull case is not convincing. The original value driver of the improving regional play is gone. Now you're just hoping the company gets bailed out of its bad decisions because it bet on the right technology. Not saying it can't happen (see STRP), but we're in speculative territory now.

Just an opinion from someone with no dog in this fight, but perhaps it's time to move on.
Vince Martin profile picture
Great comment, thank you. Obviously a number of investors feel the same way. And let me point out that I argued that it "amplifies" the bull case AND the bear case - there's more risk in the stock today than there was on Friday.

#1 - won't argue with you, and obv OnX is my least favorite part of this deal. When tech companies sell themselves for sub-7x EBITDA multiples, I wonder what they know that I don't.
#2 - fair take. I don't know that I saw CBB as a takeout play in the mid-term, and one analyst asked if CBB instead is going to try and be a roll-up itself.
#3 - ICX was a dot-com bubble purchase 17 years ago. And again this isn't a synergy-driven play. They're saying there are some synergies, but they're modest, and CBB itself isn't arguing that synergies are the driver here. They're acquiring ~$140M+ in EBITDA and projecting $21M in synergies. Maybe they hit that number, maybe they don't, but the $21M isn't the attraction here.

To me, it's simple. If fiber is a winner, the deal is a winner (at least the HT part). If not, CBB is a quicker, bigger loser. As always we shall see, and thanks sincerely for the comment.
Charlie's Munger profile picture
Doing business in Hawaii? No thanks...
Vince Martin profile picture
Why? Bc you think mgmt made the deal just to go to Hawaii, or bc you think it's a crappy market?
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