I'm Buying More Cincinnati Bell -- Here's Why

I'm Buying More Cincinnati Bell -- Here's Why

My Special Situations portfolio has been an avid buyer of Cincinnati Bell stock over the last year and now has 5% of its capital in the stock. I'm now planning to add another 3 percentage points next week, plowing $2,000 into the stock. The stock is still undervalued, and I expect that Cincinnati Bell will soon begin selling down its stake in 69% held CyrusOne and using those proceeds to retire its own debt, significantly increasing CinBell's own free cash flow.

Here's the story
The investment thesis at CinBell is much the same as my first recommendation in March last year. The telecom owns a 69% interest in high-growth data-center REIT CyrusOne. That company has been growing EBITDA at near 20% recently and expects a similar performance this year as it builds out its business. The value of CinBell's stake comes to more than $1 billion and that could increase dramatically as CyrusOne continues its torrid growth track.

CinBell has said that it will file a shelf registration later this month, allowing it to pare its stake in CyrusOne, but the company has left uncertain the time frame for selling off the asset entirely. Management has insisted that it will prudently unload the stake in order not to cause disruption in CyrusOne stock, and in a recent analyst day presentation, CFO Leigh Fox remained coy about CinBell's plans for monetizing that stake. He stated:

I get a lot of questions on it, and I've been pretty consistent in saying that no one is going to know what we're going to do until we do it... because I believe our job is to create value for the shareholder, me saying too much about our intentions on that just destroys value.

CinBell also has the possibility of selling its wireless business, and more potential buyers have joined the mix, according to Fox. Any proceeds there would likely be used for trimming debt as well. The company has been shopping the asset for about a year, and it would be great to see them monetize it at a fair price.

And there's also some to be realized not just on the financing side, but also the operational side. Cincinnati Bell should also have fundamental improvement in its core wireline business, with revenue slated to actually grow this year. And that should help free cash flow return to positive territory this year.

A growing core business and substantially reduced debt should allow the telecom to refinance and reduce the interest rates on its outstanding debt, rates that are near 8% now. That could drive still more incremental cash flow, and that would be great to see.

One final point: In the recent presentation, Fox stated that CinBell's stock was undervalued and gestured toward his recent open-market purchases of the stock -- about $10,000 in early December. While that's a nice signal, I expect that Fox will add more to his stake, if he believes that the stock is clearly undervalued.

Foolish bottom line
So we're in much the same situation at CinBell as we were during my first purchase of the stock nearly a year ago. But I'm back for more on the cusp of value-creating transactions that the market just doesn't seem to appreciate yet. As I mentioned, my Special Situations portfolio will be adding $2,000 to my position next week.

Interested in Cincinnati Bell or have another stock to share? Check out my discussion board or follow me on Twitter @TMFRoyal.

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Jim Royal and The Motley Fool own shares of Cincinnati Bell. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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