Cincinnati Bell focuses on data centers as future, key to debt cuts

By Paul Deckelman

New York, Nov. 30 - Cincinnati Bell, Inc. is one of the most venerable communications providers in the U.S., its 1873 founding as a telegraph company actually predating by several years the invention of the telephone. But while providing phone service in Cincy has been its bread and butter since then, the company sees its future offering data center colocation services to customers far beyond the banks of the Ohio River - and it hasn't been afraid to take on leverage to make that transition.

"We did increase our net debt" in order to support last year's acquisition of CyrusOne, a Texas-based provider of such colocation services to business customers, Cincinnati Bell's chief financial officer, Kurt Freyberger, told investors at the Bank of America Merrill Lynch Leveraged Finance Conference in Scottsdale, Ariz. on Wednesday

"Our leverage ratio popped up with that acquisition," he said, as net debt rose to $2.442 billion, or 4.7 times adjusted EBITDA, at the end of 2010, from about $1.941 billion, or 4 times EBITDA, a year earlier. But he added that "it has been coming down a little bit since then." As of the end of September of this year, the ratio had eased to 4.5 times EBITDA.

Wheeling and dealing in 2010

To finance the $525 million CyrusOne acquisition, as well as refinance existing debt and provide money for general corporate purposes, the company in late May of 2010 entered into a $970 million bank credit agreement, consisting of a $760 million seven-year term loan and a $210 million four-year revolving credit line. The term loan priced in early June of 2010, carrying an interest rate of 500 basis points over Libor with a 1.5% Libor floor. With an original issue discount, it priced at 97.

The company also sold $775 million of new 8 3/8% senior notes due 2020 in two quickly-shopped tranches, a $500 million offering that priced at par on Oct. 7, 2010 and a $275 million add-on that priced at 101 on Nov. 8, 2010. Proceeds from the two bond deals were used to pay down bank debt.

Earlier last year, Cincinnati Bell sold a quick-to-market $625 million offering of 8¾% senior subordinated notes due 2018. That deal priced at 98.596 on March 10, 2010 to yield 9%, and proceeds were used to redeem the company's $375 million of outstanding 8 3/8% senior subs due 2014.

Maturities pushed further out

"Importantly, our debt maturities are pushed out a bit due to the refinancing plans that we've had in previous years," Freyberger said. While the company has $248 million of 7% senior notes coming due early in 2015, the CFO noted that "90% of our outstanding maturities come due in 2017 and beyond, so we do have a bit of a runway here, where we can continue to invest in the data center business."

Five hundred million dollars of 8¼% senior notes are due in 2017, followed by the $625 million of new subordinated 2018 notes and the $775 million of new 2020 senior notes issued last year. The company also has a few other, smaller issues maturing after 2021 totaling $248 million, the largest of which is $150 million of 6.3% debentures due in 2028.

Data centers: future hope

Freyberger calls the data center colocation business "our growth engine at this point." Cincinnati Bell operates data centers in the Cincinnati area, in Texas, eventually in Phoenix, where the company recently bought a big tract of land for a new 1 million-square foot data center, as well as in London and Singapore.

The Ohio company aims to expand far beyond its Midwestern base to become a "preferred global provider of data center colocation to Fortune 1000 companies." It already has about 40 such U.S. clients, and another roughly 20 overseas clients of equal size.

Colocation involves an operator like Cincinnati Bell setting up centers, where it can provide, on a rental basis, the physical space, electric power, cooling, security and network connectivity for the customer companies' servers, storage, and networking equipment, sparing those customers the need of actually buying or building centers to host their own IT equipment.

Freyberger said that "we've been investing heavily in this portion of our business. We like the long contracts, big customers, big space, high returns and high growth of this industry, so you can expect to see us to continue to see us invest pretty heavily in the data center colocation space."

He said that the company's strategy at this point "is to take the free cash flow which is generated by our wireline and our wireless operations, which is very substantial, and invest it into our data center opportunities."

The company remains the dominant provider of traditional wireline telephone service in the Cincinnati metropolitan area, which includes parts of neighboring Kentucky and Indiana, and in Dayton, Ohio. It is also major provider of related products like data services, broadband and wireless services, especially by bundling two or more together with voice in discount packages for customers. However, it is continuously feeling the pressure from larger, better-funded competitors.

This is particularly the case in wireless, where it is at a distinct disadvantage to national giants like AT&T and Verizon, leading to market-share losses, and Freyberger ruefully acknowledged that this downward trend would likely continue - leading Cincinnati Bell to look into other, more potentially lucrative alternatives for its future, such as data center colocation.

Spin-off a possibility

During the question-and-answer portion of the proceedings following his formal presentation, the question came up whether Cincinnati Bell might look to monetize those potentially lucrative data center assets by spinning them off or otherwise separating the business from its slower-growth, more traditional operations. He declared that "we'll certainly be mindful - and continue to be mindful - of the fact that we don't believe we're getting appropriate credit [in our] stock price for the data center companies, because it is attached to the telco."

However, after the CFO said that such a separation might be possible sometime in the future, should management deem it necessary to boost the company's value, he was asked what impact this would have on the company's debt investors. In such a scenario, they might be faced with the unhappy prospect of having the high-flying part of the company spun off, leaving the bondholders stuck with the less-valuable traditional businesses, showing little real growth or actually going through a secular decline, to support that debt.

Freyberger said that "the reason we're in the data center business to begin with is we love the returns - we think the returns we're going to get from that business are going to be very, very good, and enough to pay back the large amount of debt that we have."

He said that "we look at this as, if we do keep the asset, it's going to help us pay down the debt. And if we monetize the asset, it will very quickly help us pay down the debt at the parent-company level."

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