Cincinnati Bell is going to the M&A well today, announcing two separate deals to acquire Hawaiian Telcom and OnX Enterprise Solutions in a bid to enhance its fiber reach and IT networking capabilities.
The telco will purchase Hawaiian Telcom for about $650 million, which Cincinnati Bell said is a 23.7% premium to Hawaiian Telcom’s trialing 20-day calendar volume weighted average price (VWAP).
Under the terms of the agreement, Hawaiian Telcom shareholders will have the option to elect either $30.75 in cash, 1.6305 shares of Cincinnati Bell common stock, or a mix of $18.45 in cash and 0.6522 shares of Cincinnati Bell common stock for each share of Hawaiian Telcom.
This merger will combine Hawaiian Telcom's 1,300 employees with Cincinnati Bell's 3,000 to create what the telco said is a “bigger and stronger” company. Cincinnati Bell is committed to Hawaiian Telcom's workforce and ensuring that it can meet the needs of its customers today and into the future.
Due to the distance and separate operations, Cincinnati Bell said this merger is not expected to materially impact jobs in Hawaii.
Cincinnati Bell and Hawaiian Telcom will retain their names and separate brand identities while sharing best practices and resources to the benefit of both companies. Hawaiian Telcom will continue to be locally managed from Hawaii and its union labor agreements will be honored.
Hawaiian Telcom will have two seats on the combined company board and these seats will be held by Hawaii residents, ensuring that Hawaii is well represented when broader strategic decisions are made.
By acquiring OnX Enterprise Solutions, a technology services and solutions provider in North America and the United Kingdom, for about $201 million in cash, Cincinnati Bell will enhance its CBTS’ division to respond to more cloud.
Leigh Fox, president and CEO of Cincinnati Bell, said that while Cincinnati Bell has operated two distinct, but complementary assets—a fiber network and our IT business CBTS—it still needed a way to scale further.
“Regionally, our fiber network spans more than 65% of Cincinnati’s footprint, making it one of the most dense and competitively advantage fiber network in the country, and CBTS delivers innovative IT solutions to enterprise customers and has been expanding outside the region,” Fox said. “These 2 assets have given us an advantageous balance between capital intensive and capital lite businesses, but the lack of scale and geographic concentration has created challenges.”
Fox added that “we believe today’s announcement helps to solve for these challenges.”
For Cincinnati Bell, these acquisitions are clearly about scaling its business on two key areas: fiber network communications and enterprise IT services.
Analysts responded favorably to Cincinnati Bell’s acquisitions, citing how they will help the service provider enhance its position in the enterprise services market.
“These acquisitions help CBB gain needed scale in the communications and IT services businesses, and would be accretive to FCF/share upon closing,” said Jennifer Fritzsche, senior analyst for Wells Fargo, in a research note. “The transactions will increase CBB's exposure in the enterprise market to 76% (vs. 69% today).”
On the fiber front, Cincinnati Bell is looking to repeat the same success it had in building out regional fiber across southwestern Ohio to a new geography as a combined company.
“Our fiber investments have been the foundation for growth,” Fox said. “Our superior assets, brand equity and customer relationships combined with our early decision to accelerate our regional fiber build have created a network offering higher internet speeds than our competition.”
Cincinnati Bell continues to be aggressive with its FTTH expansion strategy, passing over 100,000 homes with fiber in 2016.
In the areas where it has installed fiber, Cincinnati Bell is seeing positive penetration rates for video, data and voice: Twenty-six percent for video, 38% for internet and 18% for voice.
At the same time, the fiber build is also providing benefits to its local business unit by enabling it to more effectively battle Charter Communications’ poaching of local small and medium-sized business (SMB) customers.
Cincinnati Bell has been suffering SMB customer churn in areas where it has copper-only T-1 and DSL options. Charter has been winning over business customers with higher speeds for businesses that leverage its existing hybrid fiber coax (HFC) networks.
Likewise, Hawaiian Telcom saw during its first-quarter period significant growth in the 100 Mbps to 1 Gbps bandwidth subscriber range. The company reported FTTH customers that had speeds of 100 Mbps to 1 Gbps grew the fastest, 86% year-over-year in the first quarter. Out of the 203,000 fiber-enabled homes on Oahu, over 63% were fiber-to-the-home and could get those ultrafast speeds.
Cincinnati Bell’s accelerated fiber build and existing assets will enable it to provide higher speeds and keep pace with cable competition.
Upon completing the merger, Cincinnati Bell gains access to Honolulu, which has a well-developed fiber network and the growing neighbor islands. Cincinnati Bell said the combination will provide Hawaiian Telcom with expanded liquidity and capital flexibility to continue to expand its next-generation fiber network to enable growth and better serve its customer base statewide.
As a combined company, the total fiber network size will exceed 14,000 fiber route miles.
“Hawaiian Telcom has built a strong brand and a leading market position over its 130-year history and has a unique opportunity in commercial, MDU, small cell and attractive fiber builds,” Fox said. “We are gaining incumbent access to well-developed fiber-rich markets, expanding our fiber network to over 14,000 fiber route miles, and further differentiating Cincinnati Bell from traditional carriers.”
Fox added that “Hawaiian Telcom’s investments to expand its next-generation fiber network throughout the Hawaiian Islands will position Cincinnati Bell to replicate our fiber success and capitalize on commercial opportunities that the Hawaiian market represents.”
Additionally, Hawaiian Telcom provides Cincinnati Bell with direct access to the 2.6 Tbps of Trans-Pacific fiber cable capacity linking Asia and the U.S., which expands Cincinnati Bell's route diversity and gives the combined company exposure to large, data-hungry demographics on both sides of the Pacific.
“This combination also brings Cincinnati Bell opportunities to expand beyond Hawaii, providing the company with direct access to the 2.6 Tbps of capacity linking Asia to the United States,” Fox said. “We will expand route diversity and exposure to large data-hungry demographic on both sides of the Pacific.”
Cincinnati Bell said it is committed to investing in Hawaiian Telcom's next-generation fiber network statewide, which will create additional opportunities for growth.
Besides scaling the FTTH holdings, Cincinnati Bell sees an opportunity to be more prepared to take advantage of emerging 5G wireless backhaul opportunities and Internet of Things (IoT).
“The need for fiber infrastructure that supports 5G, high-density data transition is one of the key trends that will define telecommunications in the future,” Fox said. “The explosive growth in IoT and the estimated $6 trillion expected in investments expected over the next five years presents significant opportunities to leverage our fiber network.”
Driving CBTS cloud, hybrid IT growth
Through its acquisition of OnX, Cincinnati Bell will be able to further the CBTS unit’s goal to transform itself into becoming a hybrid IT provider.
By acquiring OnX CBTS, Cincinnati Bell’s IT business, the company is expanding its portfolio of enterprise networking, unified communications and data center solutions to become an integrator for both voice and data.
In parallel, the company is extending its geographic footprint and diversifying its customer base, adding incremental value for existing customers.
Specifically, the OnX deal expands CBTS’ footprint to over 20 IT sales offices and provide access to over 50 data centers through strategic partners, increasing the company’s presence in the U.S. and Canada.
“The acquisition of OnX adds meaningful scale to our IT business,” Fox said. “Our footprint will expand to 20+ sales offices, primarily in North America, creating a national platform for SD-WAN, Unified Communications as a Service (UCaaS) and cloud capabilities, which enable us to provide end-to-end services to 49 states.”
Additionally, OnX also brings efficiencies and customer diversification, including several Fortune 500 companies.
Upon completing the acquisition, Cincinnati Bell will restructure its business services unit to have all of its cloud-based sales from Hawaiian Telcom and OnX under CBTS.
“This move allows us to simplify the organization and better highlight the impressive size and scope of our UCaaS business,” Fox said.