Monday, July 2, 2018

Cincinnati Bell acquires Hawaiian Telcom

Cincinnati Bell completed its acquisition of Hawaiian Telcom, the leading integrated communications provider serving Hawaiʻi, and the state’s fiber-centric technology leader. The deal was first announced a year ago.

“Today marks a tremendous milestone for Cincinnati Bell and Hawaiian Telcom as we take an important step together toward expanding our portfolio of next-generation fiber offerings and securing fiber density value for our customers and shareholders,” said Leigh Fox, President and Chief Executive Officer of Cincinnati Bell. “Fiber density remains a key market differentiator in an increasingly competitive environment. By allowing us to better anticipate and capitalize on the fast-growing demand for strategic fiber offerings, this combination positions our company to be at the forefront of innovation in telecommunications and establishes a platform for future growth.”

An unlikely merger – Cincinnati Bell and Hawaiian Telcom

It is not a surprise to see another telecom acquisition. The industry perpetually moves toward consolidation whenever greater efficiencies can be found by bringing more users onto a common network. But among all likely buyers and sellers in the telecom world, this combination is surely a bit odd: Cincinnati Bell and Hawaiian Telcom. Geographically, Honolulu lies 4,428 miles (7,126 km) to the southwest of Cincinnati, a six-hour time difference and a big cultural gap. There won't be many opportunities for network consolidation, joint customer integration or operational synergies.

The deal is structured as a cash and stock transaction in which Cincinnati Bell will pay approximately $650 million, including the assumption of Hawaiian Telcom's net debt. The offer is a 26% premium to Hawaiian Telcom's closing price of $24.44 on July 7, 2017. Hawaiian Telcom stockholders 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, subject to proration such that the aggregate consideration to be paid to Hawaiian Telcom stockholders will be 60% cash and 40% Cincinnati Bell common stock. Cincinnati Bell shareholders are the prevailing party. After closing Hawaiian Telcom stockholders will own approximately 15% and Cincinnati Bell stockholders will own approximately 85% of the combined company.

Sovereignty has long been a touchy issue for the Hawaiian Islands. In this case, Cincinnati Bell said it plans to preserve the Hawaiian Telcom brand identity. It also promises to preserve the jobs of Hawaiian Telcom's 1,300 employees, to maintain local management, to honour existing union labour agreements, and to name two Hawaii residents to the combined company’s board of directors. There is also a commitment to invest in Hawaiian Telcom's Next-Generation Fiber network statewide, although this is not quantified in the press materials with any dollar figure or budget plan.

Hawaiian Telcom has been to this dance before

Hawaiian Telcom traces its roots all the way back to 1883, when Hawaii’s King David Kalākaua granted a charter to Mutual Telephone Company, which was owned by Archibald Scott Cleghorn, father of Princess Ka'iulani. In the years after Hawaii became the 50th U.S. state, Mutual changed its name to Hawaiian Telephone Company and was never formally a part of the Bell System empire. In 1967, General Telephone & Electric Corporation (GTE) of Connecticut acquired the company and it was renamed to GTE Hawaiian Tel. This marked the first time the company was controlled from the mainland U.S. GTE eventually merged with Bell Atlantic to form Verizon Communications, at which point GTE Hawaiian Tel. was renamed Verizon Hawaii. By 2004, Verizon wanted out of non-strategic landline markets, including Hawaii, and so Verizon Hawaii was sold to The Carlyle Group for $1.65 billion in cash. At the time, Verizon Hawaii operated 707,000 switched wireline access lines and annual sales of about $610 million, operating income of $58 million and depreciation expense of $111 million. By this measure, the Cincinnati Bell acquisition price is less than half the price of 13 years ago.

In 2008, the company filed for bankruptcy protection. A two-year period of reorganisation followed. In 2010, Hawaiian Telcom became a publicly listed company. In 2011, Hawaiian Telcom was granted a cable TV license. One geographic advantage on being in the middle of the Pacific Ocean is that there is limited satellite TV coverage. This has led to a duopoly market shared with the Oceanic/Charter cable network. Compared to typical U.S. cities, Honolulu is a far denser metro area. It has approximately 300,000 households. With an initial focus on Honolulu, Hawaiian Telcom currently has about 43,000 residential video subscribers on its IPTV platform, which is based on the Ericsson Mediaroom solution, compared to approximately 310,000 subscribers for Oceanic cable statewide.

With its Fioptics service, Hawaiian Telcom is looking for much better market penetration, higher ARPU and lower churn. The fibre platform also enabled Hawaiian Telcom to launch the first Gigabit residential service in the islands in 2015. Presumably, the acquisition by Cincinnati Bell will bring much needed capital to continue the residential fibre in the rest of Honolulu and then to the other Hawaiian Islands.

A stake in the new SEA-US transpacific cable system

Hawaiian Telcom is a consortium partner in the new $250 million, 15,000-km Southeast Asia – U.S. (SEA-US) cable system, which is designed to bypass congested, earthquake-prone regions (Luzon Straight) on the transpacific route. It will deliver an initial 20 Tbit/s capacity when it enters service later this year. Cincinnati Bell noted that this ownership stake provides it with direct access to the 2.6 Tbit/s of transpacific capacity.

Cincinnati Bell's history also goes back a long way. The company traces its start to the 1870s, when it gained exclusive rights to the Bell franchise within a 25-mile (40-km) radius of Cincinnati. Under the unified Bell System, the company maintained a degree of autonomy because AT&T held a minority stake. Since the historic 1984 AT&T break-up, Cincinnati Bell has fiercely remained an independent company, resisting the merger fever that spread amongst Bell Atlantic, Bell South, Nynex, Pacific Bell and Southwestern Bell.

Apart from its landline business, Cincinnati Bell operated a GSM network serving southeastern Indiana, southwestern Ohio, and northwestern Kentucky from 1998 to 2015, when the network was sold to Verizon. Cincinnati Bell also owned approximately 9.5% of CyrusOne, the wholesale data centre operator. The remaining 2.8 million shares of CyrusOne were sold in Q1 2017 for $141 million, resulting in a $118 million gain for the company.

Cincinnati Bell has been a very well-managed company but like many incumbent operators has experience the long-term challenge of declining revenues for legacy services, which often offset growth in new services. The company has been on the lookout for attractive opportunities to increase revenues from strategic services (currently >50%) and to alleviated its relative geographic isolation. Cincinnati Bell is focused on its Fioptics residential FTTH service, which is now available to 545,200 addresses in its territory - approximately 68% of Greater Cincinnati. With the Hawaiian Telcom deal, the company is hoping the positive traction it has seen with its Fioptics residential service in Cincinnati can be replicated in Honolulu.

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