Cincinnati Bell (CBB) September 22, 2014 Telecommunication Services Stock Rating Sell

Transcription

1 The Henry Fund Henry B. Tippie School of Management Katie Carlson Cincinnati Bell (CBB) September 22, 2014 Telecommunication Services Stock Rating Sell Cincinnati Bell is a diversified telecommunications company that has been in operation since We believe that their stock is fully valued and with the sale of their wireless division and their high amount of debt, there is not much growth potential for the company. We recommend a SELL rating for Cincinnati Bell. Drivers of Thesis Monetizing CyrusOne Investment. Cincinnati Bell is currently beginning to monetize their investment in CyrusOne. They are using the cash to pay down debt which will improve their balance sheet. Fioptics Growth Initiatives. Cincinnati Bell has been making strategic investments in their Fioptics division in order to gain a larger share of customers in their service area. If they are financially able to continue to make investments in their Fioptics, it could lead to greater revenue growth in this segment. Risks to Thesis Investment Thesis Target Price $3.55 $3.94 Henry Fund DCF $3.86 Henry Fund DDM N/A Relative Multiple $1.55 Price Data Current Price $ wk Range $ Consensus 1yr Target $4.42 Key Statistics Market Cap (B) 769.5M Shares Outstanding (M) 209.1M Institutional Ownership 74.0% Five Year Beta 1.19 Dividend Yield 0.0% Est. 5yr Growth 2.0% Highly leveraged. Cincinnati Bell currently holds $2.2 billion in debt on their balance sheet and has negative debt to equity ratios due to negative shareholder s equity account. This limits their use of free cash flow to be used for other investments due to their high interest debt repayments. Sale of Wireless Division. In April 2014, Cincinnati Bell announced they were selling their wireless division to Verizon Wireless and will no longer offer wireless services as of early As their wireless segment represented 16% of their revenues in 2013, this could be detrimental to revenue growth as a company. Important disclosures appear on the last page of this report. Price/Earnings (TTM) N/A Price/Earnings (FY1) Price/Sales (TTM) 0.61 Price/Book (mrq) N/A Profitability Operating Margin 15.17% Profit Margin 8.12% Return on Assets (TTM) 5.54% Return on Equity (TTM) N/A Earnings Estimates 0 Year E 2015E 2016E -1.6 ROE EPS $0.04 $0.00 $-0.32 $0.04 $0.03 $0.03 growth -55.6% -90.3% -1.0% 1.1% -11.3% 0.0% 12 Month Performance Company Description 35% 25% 15% 5% -5% -15% CBB S&P 500 S O N D J F M A M J J A CBB Industry Sector Debt/ Equity Cincinnati Bell is a diversified telecommunications company that was founded in They are headquartered in and service the Greater Cincinnati and Dayton, Ohio areas. They operate in three reportable segments which offer wireless, wireline, long distance and voice over internet protocol (VoIP), data, cable television, and IT hardware and services.

2 EXECUTIVE SUMMARY Cincinnati Bell is a company that has been in business in their service area for over 100 years and is well-known. However, they have struggled financially as many other telecommunications company have through the recent downturn of the economy and the significant investments that telecom companies have needed to make to keep up with the demands of their consumers. We believe that Cincinnati Bell is a solid company, however the risks to the company outweigh the opportunities, as noted in our drivers and risks to thesis sections of this report. We have valued their stock at $3.86, which is currently only slightly above what it is trading at now, which is $3.67. We believe their stock is fully valued and there is very little upside to holding an investment in the company. Therefore we are recommending a SELL for Cincinnati Bell. COMPANY DESCRIPTION Cincinnati Bell is a telecommunications company based out of Cincinnati, Ohio that provides full-service entertainment, data and voice communications over wireless and wireline networks, information technology services, and a reseller of information technology and telephony equipment. Recently, Cincinnati Bell announced that they are selling their wireless services division to Verizon Wireless, and will no longer be providing wireless communication services after February Cincinnati Bell also owns a subsidiary, Cincinnati Bell Technology Solutions (CBTS), which services enterprise customers for communications services and information technology solutions. Additionally, Cincinnati Bell owns a 44% stake in CyrusOne, a data center colocation company that previously was fully owned by Cincinnati Bell until their IPO in January % 16% 2013 Revenues by Segment 57% Wireline Wireless IT Services and Hardware Wireline Cincinnati Bell s wireline division provides products such as local voice services, high-speed internet, data transport, long distance, entertainment, and VoIP (voice over internet protocol) services. Their coverage area includes Cincinnati, Ohio and a radius surrounding 25 miles, and parts of northern Kentucky and southeastern Indiana. They also provide voice and data services beyond these territories in Dayton and Mason, Ohio, through a subsidiary called Cincinnati Bell Extended Territories LLC. Additionally, their wireline division, provides long distance and VoIP services through their subsidiaries Cincinnati Bell Any Distance, Inc. and evolve Business Solutions LLC subsidiaries. Their wireline segment is the most profitable of all of their segments, making up 57% of their total revenues in We believe this segment is solid will continue to be profitable as they expand their Fioptics networks (which include voice, internet and video services) through likely acceleration of fiber build-outs and expansions 1. We have forecasted their wireline segment to grow 1.5-2% through 2015, following by negative growth in the remainder of our forecast period. We believe that although this segment has been profitable for the company in the past, that the decline of wireline use as a trend in the industry will stimulate less growth for this segment. IT Services and Hardware Cincinnati Bell s IT services and hardware division provides managed IT solutions, IT telephony and equipment sales, and professional IT staffing services. This segment consists of two major product and services lines: Managed and Professional Services and Telecom and IT Equipment. Their Managed and Professional Services division provides services including electronic data storage management, data security management, telephony & server management, as well as staff augmentation and professional IT consulting and mostly services enterprise customers. Their Telecom and IT Equipment division provides products such as telecommunication and computer equipment to new and current customers. Their IT Services and Hardware division made up 27% of their revenues in 2013, and we believe this segment will continue to experience moderate growth due to the demand for big data services in the telecommunications industry 1. We have forecasted this segment to grow 15% in 2014 followed by decline growth of % in the Page 2

3 remainder of our forecast period. We believe that they will remain profitable in this segment due to a greater need of IT services to keep up with big data use. Wireless Cincinnati Bell s wireless division provides digital wireless voice and data communications services in the Greater Cincinnati and Dayton, Ohio areas, and areas of northern Kentucky and southeastern Indiana. This segment can be broken down into service revenue, including monthly postpaid subscriber plans and prepaid subscriber plans, as well as equipment revenue for phone handsets and accessories. As previously mentioned, Cincinnati Bell announced in April 2014 that they have sold their wireless division to Verizon Wireless for $210million, and will no longer be offering wireless services to customers as of February In 2013, this segment represented 16% of the company s total revenues. Equity Investment in CyrusOne Cincinnati Bell previously owned CyrusOne, an enterpriseclass data colocation services company that completed an IPO in January CyrusOne designs and builds data centers for over 625 customers and is the preferred global data center provider for more than 130 of the Fortune 1000 companies and 9 of the Fortune 20 enterprises. They are headquartered in Houston, TX and service businesses in the United States, Europe and Asia 2. As of June 2014, Cincinnati Bell owns a 44% stake in CyrusOne. CyrusOne has done very well over the last year, with its stock IPO at $19 per share and has now increased 36% to around $26 per share. Cincinnati Bell has begun to monetize on their stake in CyrusOne, selling off one tranche of their stake in the company in August They are planning to continue to strategically monetize their stake in the company and use the cash proceeds to pay down debt on their balance sheet 3. Source: Yahoo Finance Company Analysis The majority of Cincinnati Bell s revenue is generated through their wireline and IT services segments, which have historically proved to be solid segments with consistent revenue growth. Their current focus is on growing their Fioptics services in these segments, which they categorize into three distinct segments: Strategic, Legacy and Integration products. Their strategic products have been their main focus for growth and include highspeed internet, entertainment and voice services. At the end of 2013, their Fioptics covered 35% of the company s operating geography and generated over $100 million in revenue for the company. Within Fioptics, they provide local voice services, data services, long distance and VoIP, and entertainment services. Their local voice service and long distance service access lines have continued to decrease due to the trend of moving to wireless or to other competitors, and we believe this trend will continue over the coming years. Their entertainment service customers have access to over 400 entertainment channels, 120 high definition channels, HD DVR and video On-Demand products. Currently their entertainment services are available to 35% of the Greater Cincinnati area and they had over 74,200 subscribers as of December 2013, an increase of over 560% from Their focus includes continuing to grow this customer base by expanding the number of channels and services offered with their entertainment Fioptics packages 1. In August 2014, Cincinnati Bell and ESPN signed an agreement which added ESPN s new SEC Network to their Fioptics lineup. They also have plans to add apps like Watch ESPN, Watch Disney, and Watch ABC to their services, making these available to customers by the end of However, most of their revenue growth has been within their metroethernet and VoIP products. Their metro-ethernet data services include high-speed internet access, data transport, and interconnection services. These products give customers the ability to support multiple applications on a single physical connection. The company has plans to expand this network to a wider geography through fiber build-outs. Their VoIP network supports both small companies and large enterprise customers and include cloud-based services. In Cincinnati Bell s 2 nd quarter 2014 earnings call, they mentioned that their focuses were to manage their wireless cash flows and profitability, continue to capitalize on opportunities to monetize their CyrusOne investment, Page 3

4 continue to invest in high demand strategic products, and to strengthen their balance sheet 3. Although these are obtainable strategic initiatives, we believe that Cincinnati Bell has potential for moderate long-term growth but is not a profitable investment at the moment. They are highly leveraged with over $2 billion in debt on their balance sheet, which limits a lot of their use capital and free cash flow for anything other than debt and interest repayments. In a highly competitive industry, we believe that Cincinnati Bell is not a major player due to their size and their limited growth potential due to this leverage. Although they have a solid wireline segment with consistent revenue and a growing Fioptics product line, they are a risky investment otherwise. Most of their revenue is generated through this wireline segment, and with industry trends going more towards wireless services, we do not see a lot of potential long-term sustainability of this revenue growth. As you can see in the coverage map below, Cincinnati Bell is faced with many major competitors in the telecommunications industry which poses a threat to their customer retention rate due to their size, the loss of their wireless services segment, and a potential acquisition for major players like Verizon or AT&T, for example. Source: United States Telephone Companies, Wikipedia RECENT DEVELOPMENTS Sale of Wireless Segment to Verizon In April 2014, Cincinnati Bell announced that they were selling their wireless phone business to Verizon Wireless for $210 million, due to substantial losses in subscribers over the last 5 years. Customers will still receive Cincinnati Bell wireless service until February 2015, and at that point will be able to transfer to Verizon or another carrier with no termination fee. However, customers are not able to transfer until this date, as their contracts are still in force until the transaction with Verizon Wireless is finalized. Customers of Cincinnati Bell wireless remain frustrated with this announcement, so Cincinnati Bell announced they would be providing unlimited data, talk, and text services until the service shuts down this February. We believe that this will have a considerable effect on Cincinnati Bell s revenues, as this segment represented 16% of their total revenues in However, Cincinnati Bell will be able to use the cash proceeds from this sale, valued at $194 million, to pay down debt on their balance sheet. Although this will be beneficial to their plan to deleverage themselves, we believe the harm to their revenue generation will be greater. Launch of Gigabit speed internet for customers In August 2014, Cincinnati Bell announced that they would be launching a Fioptics gigabit service to their customers. This gigabit service campaign, named Light Up Cincinnati, will provide their customers with 10 to 100 time s faster internet speeds. This campaign is all in part of their plan to expand their Fioptics networks to a greater portion of Cincinnati currently their network is available to about 40 percent of the Cincinnati area and their goal is to make these networks available to 60 to 70 percent of the area within the next two years 9. We believe that the launch of the gigabit internet speed was in response to Google Fiber s potential entry into the Greater Cincinnati area. Google Fiber is currently a high speed internet provider, with the same gigabit speeds, that has made mention of bringing their service to Cincinnati. We believe this launch will help retain customers if Google Fiber enters the region, but not necessarily bring substantial amounts of revenue increases. INDUSTRY TRENDS Declining Demand for Wireline Services The wired voice telephony services industry has experienced a decrease in demand over the last several years due to increasing popularity of substitutes like wireless telecommunication services and voice over internet protocol (VoIP). Revenues in this industry are expected to decrease 1.2% over 2014, adding to the already experienced decline of 6.5% over the last several Page 4

5 years. Wired communications providers are moving more towards expanding their services for optical fiber networks, which provide faster speeds and larger bandwidth capacity to meet the needs of their changing consumer wants (consumer adoption). Additionally, these providers are increasingly bundling packages that include VoIP, cable TV and internet together to keep up with consumer demands and stay competitive in the industry 5. Wireline industry revenue has suffered due to this trend, as shown in the chart below, using a major U.S. provider, Verizon Wireless, as an example. in millions Source: Statista 6 Although wireline continues to be one of Cincinnati Bell s strongest segments, we believe that this trend will affect their wireline operations as well. Their revenue growth will be mainly in their data and entertainment Fioptics and they will continue to experience declines in their wireline voice and long distance services. We have forecasted their wireline voice services revenue to decrease around 10-12% and their long distance services revenue to decrease 6% throughout 2018 due to this trend. in millions Verizon -Wireless vs. Wireline Revenues Source: CBB 10-K Annual Reports Wireless Wireline Cincinnati Bell Wireline Revenue Voice Long Distance VoIP Services The voice over internet protocol industry is at a high level of growth at the moment. According to IBIS World, industry revenue has grown at an annualized 12.9% in the five years leading to However this industry is also highly dependent on the growth of other industries, including mobile connections and broadband connections. VoIP providers have been forced to offer their services through mobile devices to capitalize on the trend of increased mobile internet usage over the last several years. Many of the players in this industry do not solely offer VoIP services, but instead package these services with other products 8. in billions USD Source: Statista 6 Wireline VoIP Revenue in the U.S MARKETS AND COMPETITION The wired telecommunications industry is highly concentrated, with four companies representing 96.5% of overall industry revenue. Although this industry is heavily regulated by the U.S. government, there it still seems monopolistic when it comes to the major players. These major players include AT&T, Verizon Communications, Inc., CenturyLink Inc. AT&T has the majority of the market share at 54.2%, with Verizon taking 36.2% and CenturyLink at 6.1% (the remaining 3.5% goes to other competitors). AT&T is the most profitable in the wireline industry, mostly due to its size, generating over $58 billion in revenue in 2013, followed by Verizon at $39 billion 5. This puts Cincinnati Bell in a difficult position when trying to compete for customers in this segment. They are not only less profitable, but do not have the name-brand and cannot service the large number of customers that these major players have access to. Page 5

6 Internet Service Providers The internet services industry is in a growth phase at the moment, with industry revenue growing at an annualized rate of 4.8% from 2009 to Increased adoption of cloud computing and increased internet traffic have boosted the demand for high-speed access services. There are four major players that make up 75.9% of industry revenue and 5 companies make up the majority of the industry market share, including Comcast Corporation (20.4%), AT&T (19%), Verizon (18.8%), CenturyLink (17.6%) and Time Warner Cable (13.3%) 7. In February 2014, it was announced that Time Warner Cable and Comcast Corporation would be merging, so when that transaction is complete they will become the company with the largest market share in the industry. Cincinnati Bell does is building the networks to provide the same internet services and packages that customers in the industry are demanding, however, they are a small company and limited to a specific geographical industry which poses a threat to their survival in this industry. in millions Source: Statista 6 U.S. Broadband Connections Cable TV Providers The cable provider industry is considered to be in a mature stage of its life cycle, with industry expansion averaging 0.4% over the last five years. This industry faces intense competition from substitutes like online video streaming companies like Netflix and Hulu. As you can see from the chart below, the industry has experienced slow growth in the number of cable TV subscriptions over the last several years, and isn t expected to experience a lot of growth in the upcoming years. in millions of subscribers Source: Statista 6 The major players in this industry include Comcast Corporation, with 51.9% market share, Time Warner Cable, with 26.6% market share, and Cox Enterprises, Inc., with 11.7% market share. These three major companies represent about 90.2% of industry revenue, so one can infer that smaller companies like Cincinnati Bell face severe competition when it comes to cable TV subscriptions 10. Peer Comparisons Name Source: FactSet Digital Cable TV Subscriptions in the U.S Mkt Value Price EPS P/E '13 P/E '14 EV/Sales Profit Margin CINCINNATI BELL $ x 31.40x 2.20x 8.1% Wireless/Wireline Division AT&T Inc. 180,000.0 $ x 13.20x 1.90x 13.8% Verizon Communications Inc. 202,100.0 $ x 13.60x 2.50x 12.5% Shenandoah Telecom $ x 20.20x 2.60x 9.7% Cable Division CenturyLink, Inc. 22,630.0 $ x 15.00x 2.40x -2.3% Frontier Comm. Corp. 6,358.0 $ x 31.80x 2.90x 3.9% DISH Network 30,293.0 $ x 38.70x 2.50x 6.9% Netflix, Inc. 29,107.0 $ x x 5.80x 4.2% Average 58,989.8 $ x 36.35x 2.85x 7.1% Cincinnati Bell s main competitors in their wireline and wireless divisions include AT&T and Verizon. We have also included Shenandoah Telecommunications in the comparison chart above for purposes of their size in comparison to Cincinnati Bell, although they do not service the same areas as Cincinnati Bell does. As you can see, Cincinnati Bell is a much smaller player that most of the national competitors, and we believe they are limited by this in terms of brand name recognition and reliability. Although Cincinnati Bell has been in operation for 140 years, they are a small telecommunications company that faces severe price competition for their customers when faced with the national competitors like AT&T and Verizon. Page 6

7 As already discussed, Cincinnati Bell is selling off their wireless division to Verizon in February 2015, so they will have to be able to maintain customer retention for their wireline division and cable TV divisions, mostly through competitive packaging options. For example, AT&T offers a package bundle of U-Family TV, High Speed Internet, and Digital Voice for $79 per month 11, where Cincinnati Bell has a similar package consisting of TV, internet and voice for $99 per month 12. We believe in order for them to remain profitable they are not going to be able to offer any lower prices for their packages then what they are currently offering. Cincinnati Bell s main competitors for their cable TV services are similar to their telephony services, as most of their products are offered through packaging bundles of all items. In the chart above, we outline their main competitors to be CenturyLink, Inc., Frontier Communications Corp., DISH Network, and Netflix. CenturyLink, DISH, and Frontier Communications are similar to Cincinnati Bell in the way that they offer cable TV packaging options, but we believe another major source of competition for them are online video streaming providers like Netflix. Netflix has become increasingly profitable over the last several years, as this is much cheaper, but arguably less convenient way to watch TV programs. However, with the onset of products like tablets and smart TV s in the industry, consumers are able to watch programs on Netflix at the same convenience that they would be able to watch cable TV programming. From a metrics standpoint, Cincinnati Bell is not very profitable in comparison to their competition. Their earnings per share in 2013 is at $-0.32, mostly due to the negative net income they experienced over that year. We are forecasting their EPS to be around $0.04 in 2014, but that still makes the company extremely less profitable then a lot of their competitors. However, they have strong P/E ratios and a stable profit margin for 2013 which we believe has kept them competitive. ECONOMIC OUTLOOK Interest rates are a big driver for telecommunications companies as most players in this industry are highly leveraged due to the ongoing demand for faster internet speeds and fiber networks. Interest rates have continued to decline over the last year, with the 30 year Treasury bond rate decreasing from 3.92% in January to 3.27% in September. The one year T-Bill has also experienced a decline from 0.13% to 0.09%, although it currently is almost back up to its January rate at 0.11% 13. American s are still contemplating when the big rise in interest rates will happen, but from Janet Yellen s last announcement in August we should not be expecting any rise in interest rates until mid-2015 at the earliest. The Fed also continues its tapering of quantitative easing, which most expected an increase in rates from that, but it has not happened yet. If interest rates were to rise significantly quicker than expected, this would pose a massive threat to Cincinnati Bell as they are extremely leveraged at the moment and cannot afford any higher interest payments. In late 2013, Cincinnati Bell was able to take advantage of this favorable interest rate environment and amended its Corporate Credit Agreement to have $540 million of its debt at a 4% interest rate. This is and will continue to assist Cincinnati Bell in paying down this debt as most of their other agreements hold an 8¾% interest rate 1. Real GDP growth has been favorable over 2014, with slow growth of 2.1% reported in the first quarter, offset by significant growth of 4.0% in the second quarter. We are confident that GDP will continue to grow over the next 2 years, at a more conservative rate of 3.0%, and that this will be beneficial to telecommunications providers as a strong economic environment is favorable for discretionary products like internet and TV. CATALYSTS FOR GROWTH The telecommunications industry has been going through major changes over the last several years as the demand for bandwidth and larger data storage increases. Cincinnati Bell has been trying to keep up with this trend by introducing a Fioptics division which gives their customers faster internet connections and bigger data. However, they are a smaller company that competes for market share and is threatened by major players in the industry like Verizon and AT&T. INVESTMENT POSITIVES We believe that if Cincinnati Bell continues to monetize their investment in CyrusOne, that they will be able to pay down some of their debt with the cash flows. They are currently very highly leveraged with $2.2 billion in debt on their balance which includes high interest payments on this debt. If they are able to use this cash to pay down the principal balance they will be able to improve their balance sheet significantly. They are currently using a strategy to take advantage of the Page 7

8 optimal time to sell their investments in CyrusOne and we believe they will be continue to do this over the next several years. Cincinnati Bell s is continue to make investments in their Fioptics services, which includes faster internet speeds and larger bandwidths to handle the increasing use of data. We believe that if they continue to improve their Fioptics that they will experience revenue growth in these segments, by gaining a larger share of the market that they currently service. INVESTMENT NEGATIVES Cincinnati Bell currently holds $2.2 billion in debt on their balance sheet which limits their ability to use their cash flows for anything else besides debt and interest repayments. Although their strategy is to pay down this debt through monetizing their investment in CyrusOne and selling their wireless division, they will still hold $1.3 billion in debt by the end of our forecast period. In April 2014, they announced they would be selling their wireless services division to Verizon Wireless. The sale is due to be completed by February As their wireless division made up 16% of their revenues in 2013, we believe the loss of this revenue stream could be detrimental to the overall profitability of the company. As previously mentioned, Cincinnati Bell is strategizing to deleverage themselves through various methods. Although this is positive for the company s balance sheet, we believe that the more they become deleveraged, that they may become an acquisition target for larger players like Verizon or AT&T and could potentially be bought out. VALUATION We believe that Cincinnati Bell will experience a decline in revenues until 2016, as they lose their wireless division revenue line and still experience the impact of losing CyrusOne in We do not see them as becoming very profitable until 2016 as well, for which we have given them a target price of $ We have forecasted their wireless revenues to decline 15% in 2014, as many of their wireless subscribers remain locked into their contracts. In 2015, we forecast the wireless division to decline 95% as they will no longer be offering wireless services after February For the remainder of our forecast years through 2018, we do not forecast any wireless profits for the company. We have forecasted their wireline voice services, which include landline phones, to decline 10% through 2015 and decline a further 12% through the remainder of our forecast period through We believe that wireline voice services is a dying industry as wireless and internet voice services become more available, and that eventually the majority of consumers will make the switch to wireless only, as it generally is a cheaper option than having both services. We have forecasted their wireline data to continue to be profitable as they expand their Fioptics network and make it available to a greater number of customers in their targeted regions. We have assumed growth of 10% in 2014, followed by more moderate growth of around 5% in the remainder of our forecast period. Data is a growing service and believe that most of the revenue for Cincinnati Bell will be driven through their data services. In line with wireline data mentioned above, we have forecasted significant growth in their wireline entertainment segment over our forecast period. Their wireline entertainment grew 70.6% in 2013, so we have continued to assume a more moderate growth of 18% through 2016, followed by growth of 6-8% in the remainder of our forecast period. Their wireline entertainment portion of their revenue includes gigabit entertainment high-speed internet services for VoIP and gaming services, which is a growing industry. The new release of their gigabit speed internet to residential customers in September 2014 is reason we expect such significant growth in the first few years of our forecast period. In addition to their wireline voice, we have also forecasted their other wireline segment, which includes long distance services, to decline 6% per year over our forecast period. As mentioned above in the wireline voice section, we believe that services that include landline long distance are a fading demand for customers as more customers are switching to wireless voice services, which generally include free national long distance. Page 8

9 We have forecasted their IT Services and Hardware segment to experience growth throughout our forecast period. We believe this segment will grow around 15% in 2014, followed by lesser growth of around % in the remaining 3 to 4 years. We believe there are opportunities for Cincinnati Bell to grow in this segment with their IT services as enterprise customers are requiring more technologies and consulting services to handle big data as the demand for going digital increases. Cincinnati Bell has experienced low and declining profit margins from 2010 to 2013, but we believe their profit margins will begin to improve in 2014 and beyond. We have forecasted their profit margin to be around 1.3% in 2014, increasing to 5.34% by the end of our forecast period. We believe the company will start to become profitable again through the expansion of their Fioptic products and the deleveraging of the debt on their balance sheet, but this does not necessarily mean that they remain an attractive investment at the moment. They still have extremely low profit margins in comparison to their competitors are just above the break-even point when doing business. After deleveraging themselves they may become a greater investment but we also believe that this puts them more at risk for an acquisition target for major players in the industry like AT&T and Verizon. We have forecasted the debt on their balance sheet to decrease 20% in 2014 due to the monetizing of their investment in CyrusOne. We also believe they will be able to pay down their debt an additional 14% in 2015 due to the completion of the sale of their wireless division to Verizon Wireless. In the remainder of our forecast period, we believe they will be able to pay down debt approximately 5% per year due to normal cash flows brought in through increased revenue in their Fioptics division, however they will still be highly leveraged which limits their ability to make additional investments needed to remain profitable. In our model, our discounted cash flow model gives us a stock price of $3.86, with a targeted price range of $3.55 to $3.94. As their stock is currently trading at $3.67 as of September 19 th, 2014, we are recommending a sell rating for Cincinnati Bell. KEYS TO MONITOR Overall, we believe that Cincinnati Bell s stock is fully valued and there is not much upside to holding an investment in this company any further. Due to various factors, including the loss of revenue from the sale of their wireless division, their high debt on their balance sheet, the decline of wireline usage in the industry, and the size of their company making them a potential acquisition target we believe that they will not be able to sustain significant revenue growth in our forecast to keep the investment in our portfolio. There would have to be significant events in order for us to change our valuation on the company, which include substantial growth in other segments like wireline, data, and IT services. We do not believe that this is reasonable to assume due to the size of their company and the high level of competition they face due to larger competitors in the industry. Therefore we are recommending a SELL for Cincinnati Bell. REFERENCES K Report 2. Investor.cyrusone.com, (2014). CyrusOne - Investor Relations. [online] Available at: [Accessed 11 Sep. 2014]. 3. 2Q Earnings Release CBB 4. Marketwatch.com, (2014). Cincinnati Bell and ESPN Sign Distribution Agreement for SEC Network - MarketWatch. [online] Available at: [Accessed 11 Sep. 2014]. 5. IBIS World Report Wired Telecommunications Carriers in the US June Statista.com 7. IBIS World Report Internet Service Providers in the US March IBIS World Report VoIP in the US August Josh Pichler, j. (2014). Cincinnati Bell launches gigabit Internet for consumers. [online] Cincinnati.com. Available at: [Accessed 11 Sep. 2014]. Page 9

10 10. IBIS World Report Cable Providers in the US April Att.com, (2014). AT&T Bundles - U-verse TV, High Speed Internet & Home Phone Packages. [online] Available at: ERQmjSbiP [Accessed 11 Sep. 2014]. 12. Cincinnati Bell, (2014). Bundle your Cincinnati Bell Services and Save BIG!. [online] Available at: [Accessed 11 Sep. 2014]. 13. Treasury.gov, (2014). Daily Treasury Yield Curve Rates. [online] Available at: =2014 [Accessed 11 Sep. 2014]. IMPORTANT DISCLAIMER Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. Page 10

11 CINCINNATI BELL Inc Revenue Decomposition in millions Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E Wireless YOY Change -3.9% -15.1% -14.7% -15.0% -95.0% % N/A N/A Wireline TOTAL WIRELINE YOY CHANGE -2.0% 0.8% 1.3% 1.4% 1.5% -0.6% -0.2% 0.3% Wireline Voice YOY Change -13.1% -4.8% -9.7% -10.0% -10.0% -12.0% -12.0% -12.0% Wireline Data YOY Change 0.8% 6.1% 6.6% 10.0% 8.0% 5.0% 5.0% 5.0% Wireline Entertainment YOY Change 112.4% 0.8% 70.6% 18.0% 18.0% 8.0% 6.0% 6.0% Other Wireline (incl. Long Distance) YOY Change 6.2% 0.8% -5.2% -6.0% -6.0% -6.0% -6.0% -6.0% Data Center Colocation N/A N/A N/A N/A N/A YOY Change 0.9% 6.1% -43.1% N/A N/A N/A N/A N/A IT Services and Hardware YOY Change 18.0% 5.8% N/A 15.0% 10.0% 7.5% 7.5% 4.5% Total Revenue YOY Change 6.2% 0.8% -14.7% -9.0% -11.1% 0.7% 2.0% 1.6%

12 CINCINNATI BELL Inc Income Statement in millions Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E Income Statement Sales 1, , , COGS excluding D&A Depreciation Amortization of Intangibles Gross Income SG&A Expense Restructuring Charges (credits) Acquisition Costs (Gain) Loss on Sale of Assets Impairment of Assets (excl Goodwill) Transaction-Related Compensation Operating Income Interest Expense Loss on Extinguishment of Debt Loss from CyrusOne equity investment Other (income) Expense Pretax Income (Loss) Income Taxes Net Income Preferred Dividends Dividends Declared EPS (diluted) Total Preferred Shares Outstanding Total Shares Outstanding

13 CINCINNATI BELL Inc Balance Sheet in millions Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E Balance Sheet Assets Cash Accounts Receivables, Gross Bad Debt/Doubtful Accounts Accounts Receivables, Net Inventories Prepaid Expenses Miscellaneous Current Assets Total Current Assets Property, Plant & Equipment - Gross 3, , , Accumulated Depreciation 2, , , , , , , , Property, Plant & Equipment - Net 1, , Total Investments and Advances Net Goodwill Net Other Intangibles Deferred Tax Assets Tangible Other Assets Total Assets 2, , , , , , , , Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt Accounts Payable Income Tax Payable Accrued Payroll Miscellaneous Current Liabilities Total Current Liabilities Long-Term Debt 2, , , , , , , , Provision for Risks & Charges Other Liabilities Total Liabilities 3, , , , , , , , Preferred Stock (Carrying Value) Common Stock Par/Carry Value Additional Paid-In Capital/Capital Surplus 2, , , , , , , , Retained Earnings Other Appropriated Reserves Treasury Stock Total Shareholders' Equity Total Liabilities & Shareholders' Equity 2, , , , , , , ,261.40

14 CINCINNATI BELL Inc Cash Flow Statement in millions Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E Cash Flow Operating Activities Net Income Depreciation and Amortization Allowance for Doubtful Accounts Changes in Working Capital: Changes in Accounts Receivable Changes in Inventories Changes in Prepaid Expenses Changes in Misc. Current Assets Changes in Accounts Payable Changes in Income Tax Payables Changes in Accrued Payroll Changes in Misc. Current Liabilities Changes in Deferred Taxes Net Operating Cash Flow Investing Activities (Increase) Decrease in short-term investments (Increase) Decrease in long-term investments Capital Expenditures Change in Goodwill Change in Other Liabilities Change in Tangible Other Assets Net Investing Cash Flow Financing Activities Proceeds from issuance (payment) of ST debt Proceeds from issuance (payment) of LT debt Issuance of Common Stock Payment of Preferred Dividends Provisions for Risks and Charges Change in Reserves Net Financing Cash Flow Net Change in Cash Cash and cash equivalent, beginning of the period Cash and cash equivalent, ending of the period

15 CINCINNATI BELL Inc Common Size Income Statement Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E Income Statement Sales % % % % % % % % COGS excluding D&A 46.31% 47.13% 51.16% 47.12% 47.12% 47.12% 47.12% 47.12% COGS Services (as% of total COGS) 68.55% 70.53% 66.42% 0.00% 0.00% 0.00% 0.00% 0.00% COGS Products (as% of total COGS) 31.45% 29.47% 33.58% 0.00% 0.00% 0.00% 0.00% 0.00% Depreciation 12.34% 13.49% 13.21% 17.58% 16.17% 16.79% 17.03% 17.30% Amortization of Intangibles 1.31% 1.26% 0.29% 0.45% 0.47% 0.41% 0.39% 0.37% Gross Income 40.04% 38.12% 35.35% 34.85% 36.24% 35.68% 35.46% 35.22% SG&A Expense 17.99% 18.28% 17.57% 17.00% 16.50% 16.50% 16.50% 16.50% Restructuring Charges (credits) 0.83% 0.23% 1.09% 1.32% 1.19% 0.94% 0.86% 0.87% Acquisition Costs 0.18% 0.43% 0.13% 0.35% 0.39% 0.39% 0.38% 0.37% Curtailment Loss (gain) 0.29% 0.00% -0.05% 0.00% 0.00% 0.00% 0.00% 0.00% (Gain) Loss on Sale of Assets -0.57% -0.11% 0.19% 0.35% 0.46% 0.00% 0.00% 0.00% Impairment of Goodwill 3.44% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Impairment of Assets (excl Goodwill) 0.14% 0.96% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Transaction-Related Compensation 0.00% 0.00% 3.39% 0.00% 0.00% 0.00% 0.00% 0.00% Operating Income 17.74% 18.33% 13.03% 15.84% 17.70% 17.86% 17.72% 17.47% Interest Expense 14.70% 14.85% 14.48% 14.89% 11.74% 10.04% 9.36% 8.75% Loss on Extinguishment of Debt 0.00% 0.92% 2.36% 1.75% 0.98% 0.00% 0.00% 0.00% Loss from CyrusOne equity investment 0.00% 0.00% 0.85% 0.00% 0.00% 0.00% 0.00% 0.00% Other (income) Expense 0.06% 0.12% -0.10% 0.04% 0.04% 0.04% 0.04% 0.04% Pretax Income (Loss) 2.98% 2.44% -4.55% -0.83% 4.94% 7.77% 8.33% 8.68% Income Taxes 1.71% 1.68% -0.20% -0.32% 1.90% 2.99% 3.21% 3.34% Net Income 1.27% 0.76% -4.35% -0.51% 3.04% 4.78% 5.12% 5.34%

16 CINCINNATI BELL Inc Common Size Balance Sheet Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E Assets Cash 5.04% 1.60% 0.37% % % % % -9.89% Accounts Receivables, Gross 13.06% 14.40% 13.29% 13.79% 13.79% 13.79% 13.79% 13.79% Bad Debt/Doubtful Accounts 6.07% 6.26% 7.31% 6.68% 6.68% 6.68% 6.68% 6.68% Accounts Receivables, Net 12.27% 13.50% 12.32% 12.87% 12.87% 12.87% 12.87% 12.87% Inventories 1.63% 2.08% 1.89% 1.78% 1.78% 1.78% 1.78% 1.78% Prepaid Expenses 0.77% 0.80% 0.88% 0.79% 0.79% 0.79% 0.79% 0.79% Miscellaneous Current Assets 2.25% 2.61% 4.53% 2.90% 2.90% 2.90% 2.90% 2.90% Total Current Assets 21.95% 20.59% 19.98% -0.12% % % -2.37% 8.45% Property, Plant & Equipment - Gross % % % % % % % % Accumulated Depreciation % % % % % % % % Property, Plant & Equipment - Net 95.77% % 71.83% 47.17% 56.67% 54.13% 47.45% 40.06% Total Investments and Advances 0.20% 0.18% 37.67% 53.26% 51.53% 48.60% 45.27% 42.34% Net Goodwill 19.87% 19.72% 1.15% 1.31% 1.48% 1.47% 1.44% 1.41% Net Other Intangibles 14.83% 13.35% 7.30% 7.43% 7.87% 6.84% 6.51% 6.13% Deferred Tax Assets 28.96% 27.67% 27.03% 26.74% 27.07% 24.19% 21.35% 18.91% Tangible Other Assets 4.05% 5.67% 2.71% 3.06% 2.85% 2.25% 2.01% 2.07% Total Assets % % % % % % % % Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 0.89% 0.91% 1.00% 0.95% 0.92% 0.87% 0.81% 0.76% Accounts Payable 9.12% 9.20% 7.15% 8.40% 8.40% 8.40% 8.40% 8.40% Income Tax Payable 1.06% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accrued Payroll 3.60% 3.53% 3.02% 3.40% 3.40% 3.40% 3.40% 3.40% Miscellaneous Current Liabilities 9.70% 10.47% 9.05% 9.80% 9.80% 9.80% 9.80% 9.80% Total Current Liabilities 24.37% 24.11% 20.23% 22.55% 22.52% 22.47% 22.41% 22.36% Long-Term Debt % % % % % % % % Provision for Risks & Charges 26.66% 24.61% 16.13% 15.00% 15.00% 15.00% 15.00% 15.00% Other Liabilities 11.15% 11.98% 5.92% 6.30% 6.30% 6.30% 6.30% 6.30% Total Liabilities % % % % % % % % Preferred Stock (Carrying Value) 8.85% 8.78% 10.30% 11.32% 12.73% 12.64% 12.39% 12.20% Common Stock Par/Carry Value 0.14% 0.14% 0.17% 0.18% 0.21% 0.21% 0.20% 0.20% Additional Paid-In Capital/Capital Surplus % % % % % % % % Retained Earnings % % % % % % % % Other Appropriated Reserves % % % % % % % % Treasury Stock -0.16% -0.14% -0.16% -0.17% -0.20% -0.20% -0.19% -0.19% Total Shareholders' Equity % % % % % % % % Total Liabilities & Shareholders' Equity % % % % % % % %

17 CINCINNATI BELL Inc Value Driver Estimation Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E EBITA Revenue Cost of Goods Sold Depreciation Amortization of intangibles S,G,&A Operating Lease Interest EBITA Marginal Tax Rate 38.0% 42.4% 35.8% 38.5% 38.5% 38.5% 38.5% 38.5% Income Tax Provision Plus: Tax Shield on Interest Expense Less: Tax Shield on Non-Op Income Plus: Tax Shield on Non-Op Expenses Plus: Tax Shield on Op Lease Interest Total Adjusted Taxes Change in Deferred Taxes NOPLAT Invested Capital Current Operating Assets Normal Cash Plus: Accounts Receivable Plus: Inventory Plus: Prepaid Expenses Plus: Other Miscellaneous Assets Total Operating Current Assets Current Operating Liabilities Plus: Accounts Payable Plus: Income Tax Payable Plus: Accrued Payroll Plus: Other Current Liabilities Total Operating Current Liabilities Net Operating Working Capital Plus: Net PPE Plus: PV of Operating Leases Plus: Other LT Assets Plus: Non-goodwill intangibles Less: Other LT Liabilities Invested Capital Value Drivers NOPLAT Beginning Invested Capital Return on Invested Capital 13.7% 9.7% 3.4% 6.2% 7.8% 8.2% 9.0% 10.1% Beginning Invested Capital ROIC-WACC 8.3% 4.4% -2.0% 0.9% 2.4% 2.8% 3.6% 4.7% Economic Profit NOPLAT Change in Invested Capital Free Cash Flow

18 CINCINNATI BELL Inc Weighted Average Cost of Capital (WACC) Estimation WACC = Re(E/V) + Rd(1-t)(D/V) + Rpfd(PFD/V) Yearly Preferred Dividend MV of Common Stock Cost of Preferred Stock Cost of Preferred Stock (Rpfd) % Risk-free rate Market Risk Premium Equity Beta of Firm Cost of Equity (Re) Cost of Equity (Re) 3.23% 4.64% % Cost of Debt (Rd) Cost of Debt (Rd) 6.56% MV of Common Stock Shares Outstanding Weight of Equity Weight of Equity (E) ,100, ,579,000 Weight of Debt (D) PV of Operating Leases 25 Current Portion of LT Debt 12.6 Market Value of LT Debt Weight of Debt (D) 2,289,708,447 Weight of Preferred Stock (Pfd) MV of Preferred Stock Preferred Shares Outstanding 155,250 Weight of Preferred Stock (Pfd) 7,521,863 WACC Calculation WACC = Re(E/V) + Rd(1-t)(D/V) + Rpfd(PFD/V) Re 8.75% Rd 6.56% Rpfd 6.97% Pfd 7,521,863 E 771,579,000 WACC = 5.36% D 2,289,708,447 V 3,068,809,310 (1-t) 64.20% Wd 74.61% We 25.14% Wpfd 0.25%

19 CINCINNATI BELL Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth 1.65% CV ROIC 10.07% WACC 5.36% Cost of Equity 8.75% Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E DCF Model Free Cash Flow Periods to Discount Discounted FCF Sum of DCF's 2618 Plus: Excess Cash -27 Plus: Long term investments 474 Plus: intangible Assets 92 Less: Total Debt (including PV OL) 2290 Less: Other Liabilities 74 Less: ESOP 3.09 Less: Preferred Stock 7.64 Value of Equity Shares Outstanding 208 Share Price 3.76 Price Today 3.69 EP Model Invested Capital EP Periods to Discount Discounted EP Sum of EP Beginning Invested Capital Plus: Excess Cash -27 Plus: Long term investments 474 Plus: intangible Assets 92 Less: Total Debt (including PV OL) 2290 Less: Other Liabilities 74 Less: ESOP 3.09 Less: Preferred Stock 7.64 Value of EP Shares Outstanding 208 Share Price 3.76 Price Today 3.69 Today 11/20/ Next FYE 12/31/2014 Last FYE 12/31/ Days in FY 365 Days to FYE 324 Elapsed Fraction 0.888

20 CINCINNATI BELL Inc Relative Valuation Models EPS EPS Est. Ticker Company Price 2014E 2015E P/E 14 P/E 15 5yr Gr. PEG 14 PEG 15 T AT&T $ $2.60 $ VZ VERIZON $ $3.57 $ TWC TIME WARNER CABLE $ $7.73 $ SHEN SHENANDOAH TELECOMMUNICATIONS $ $1.35 $ TWTC TW TELECOM A $ $0.38 $ Average CBB CINCINNATI BELL Inc $ 3.69 $0.04 $ Implied Value: Relative P/E (EPS14) $ 1.41 Relative P/E (EPS15) $ 1.53 PEG Ratio (EPS14) $ 0.34 PEG Ratio (EPS15) $ 0.42