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A Valuable Flea Hidden on a Big Dog



February 16, 2012 – Comments (4) | RELATED TICKERS: CBB

I recently came across a valuable, semi-hidden asset that a large dog of a corporation may be looking to monetize through an IPO or a spin-off.  The big dog that I am talking about is a company called Cincinnati Bell (CBB).

First a little background.  Cincinnati Bell This is one seriously old company.  It actually was created several years before the invention of the telephone back in 1873 as City and Suburban Telegraph Company.  Today CCV is a telecommunications provider that serves parts of Ohio, Indiana and Kentucky.  While the company offers wireless service as well as Internet access, fiber-optic television, and even electricity, it earns the bulk of its revenue by providing old-school wireline phone service.

To me, it appears as though Cincinnati Bell's wireless and wireline operations are a dog that consistently lose money and customers.  So why even bother looking at CCB as a potential investment then?  I'll tell you.  The company also has a much smaller, lesser-known data center business that seems to be thriving. 

This data center business is performing well, seeing its revenue increase 21% last quarter and 47% for all of 2011.  The its EBITDA rose 16% last quarter and a healthy 36% in 2011.  A portion of this gain is as a result of the company's acquisition of an existing data center service called CyrusOne from a private equity firm, still this portion of CCB's business seems to be performing admirably.

In its most recent earnings announcement, CCB mentioned that it is "exploring alternatives" for its data center business.

Cincinnati Bell to Explore Alternatives for Data Center Business

It remains to be seen if Cincinnati Bell will do a spin-off of this business to existing shareholders, conduct an IPO for it, or just hang onto it as is.  This review process won't be quick either.  Management stated that it expects it to take six months to a year. 

If CCB was to somehow separate its data center business the new company would be much, much smaller.  In 2011 the data center business generated $185 million in revenue, compared this with Cincinnati Bell's total revenue for the year of $1.5 billion.  That actually is a really good thing for a smaller investor like myself because it means that the data center business may be tiny enough that existing CCB shareholders might sell any shares that they receive in a spin-off, causing the stock to drop post-spin.  This sort of situation happens all the time in spin-offs. 

It also means that it might be small enough that it would not receive coverage from analysts and that the big boys of the investing world, such as hedge funds, etc might not bother with it.

Having said all of this about the data center being a small portion of the company's total business, CCB's stock has been on a tear lately, rising more than 30% over the past couple of months.  This leads me to believe that someone has their eye on the data center business and that it isn't exactly flying under the radar. 

As I said though, any new stand-alone data center entity would be relatively small and any sort of separation from the company likely won't happen for a while so CCB has a lot of time to turn in a few mediocre quarters and see its stock come back down to Earth.

I often will buy into companies that are going to conduct a spin-off of certain operations before the transaction actually takes place if I feel as though the business of the former parent company is attractive enough.  Studies have shown that spinners as well as spinees (are those even words?) outperform the S&P 500 on average.  In this case however, I don't want anything to do with CCB.  I am going to keep an eye on the situation and see what it eventually decides to do with CyrusOne.  If the company does do something with it and the price is right I would be very interested.


4 Comments – Post Your Own

#1) On February 16, 2012 at 3:06 PM, TMFDeej (97.71) wrote:

If a spin-off does happen, it is possible that the data center business would operate as a REIT.  Sweet.

Will CyrusOne Become a REIT?


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#2) On February 16, 2012 at 7:18 PM, Teacherman1 (< 20) wrote:

Thanks for the heads up Deej.

CyrusOne has a lot of data centers in my neck of the woods.

Will keep an eye on this.

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#3) On February 18, 2012 at 8:05 PM, constructive (99.97) wrote:


Speaking of telecom, here's a situation you might be interested in.  Hawaiian Telecom (formerly Verizon Hawaii, then a private equity victim) emerged from bankruptcy in late 2010 with significantly reduced liabilities.  They trade for 6.5x annualized earnings, 1.1x tangible book value and have a very literal competitive moat.  HCOM is not very followed and sold off hard in 2011, leading to the current bargain price.

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#4) On February 19, 2012 at 9:36 PM, constructive (99.97) wrote:

Also speaking of telecom and special situations, Analytic Firepower has done a great job building a case against AMT.  In particular the likely unprofitability of their growth in India.

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