We added the Cincinnati Bell (NYSE:CBB) 6 3/4% Depositary Shares Cumulative Convertible Preferred Stock (CBB.PB) to the HDS+ portfolio in April 2020. In the ensuing four months, it has given us a total return of 6.53%, comprised of a $2.10 price gain, and one quarterly $.8438 distribution:
Cincinnati Bell is getting bought out by Macquarie Infrastructure Partners for $15.50/common share – the deal is expected to close in Q2 2021. CBB was previously being bought out by Brookfield Infrastructure Partners (NYSE:BIP), but management ended that deal and went with the Macquarie deal instead.
Don’t confuse MIP with the troubled Macquarie Infrastructure Corp. (NYSE:MIC) – the two entities are unrelated.
“An MIP-controlled subsidiary will acquire all outstanding shares of Cincinnati Bell for $15.50 per share in a cash transaction valued at approximately $2.9 billion, including debt. MIP is a fund managed by Macquarie Infrastructure and Real Assets (“MIRA”). Certain Special Opportunities funds (“Ares Funds”) managed by the Private Equity Group of Ares Management Corporation (ARES) (“Ares Management”) have agreed to provide equity financing for the Transaction.”
“The Transaction, which is expected to close in the first half of 2021, is subject to certain customary closing conditions, including the approval by Cincinnati Bell’s shareholders, expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and receipt of certain other regulatory approvals.”
Here’s the company overview from the Macquarie website:
Macquarie Group Ltd.
Macquarie is a diversified financial group providing clients with asset management and finance, banking, advisory and risk and capital solutions across debt, equity and commodities. Founded in 1969, Macquarie employs more than 15,700 people globally and is listed on the Australian Securities Exchange.
Macquarie Group has a strong record of 51 years of straight profits:
Macquarie Infrastructure and Real Assets – MIRA
For 25 years, MIRA has partnered with clients, governments and communities to finance, manage, develop and enhance essential real assets. Today, MIRA’s portfolio is relied on by more than 100 million people every day. Our team of over 800 people invests in businesses that underpin economies and communities – aiming to add real and lasting value for our clients and the people our assets serve. MIRA manages ~$US 108 billion in assets, including: 155 portfolio businesses, approximately 600 properties and 4.7 million hectares of farmland. Its net profit was up 17% in fiscal 2020:
Macquarie Asset Management
MIRA is part of Macquarie Asset Management – MAM.
The asset management arm of Macquarie Group, MAM, is a top 50 global asset manager, providing investment solutions to clients across a range of capabilities, including infrastructure, real estate, agriculture, equities, fixed income, private credit, liquid alternatives and multi-asset solutions. As of 3/31/20, MAM had ~$US 409 billion of assets under management. MAM accounted for 40% of Macquarie Group’s net profits in fiscal year 2020 – its net profit was up 16% vs. fiscal year 2019.
In fiscal Q1 ’21, MAM sold its rail operating lease business to Akiem, a French rail operator in Europe, in April. Its profits were down ~5%, mostly driven by currency effects. Its MIRA division had ~$18B in capital to deploy, as of 6/20/20.
The Macquarie Group is very well capitalized, with $24.8B Australian in capital, giving it a $71.B Australian dollar surplus. MAM had $2.8B Australian dollar, as of 3/31/20. The group’s annuity-style businesses have a~22% ROE over the past 14 years:
These are cumulative preferred shares, so the company must pay holders for any skipped dividends. They’re also convertible into the CBB common shares.
CBB’s investor relations dept. gave more detail as to how the preferred shares will be affected by the buyout via the buyout proxy:
“What will happen to the 6 3/4% preferred shares and the depositary shares representing interests in such 6 3/4% preferred shares in the merger?
A: If the merger is completed, each 6 3/4% preferred share and depositary share representing one-twentieth of a 6 3/4% preferred share issued and outstanding immediately prior to the effective time of the merger will remain issued and outstanding immediately following the effective time of the merger.
After the effective time of the merger, the company will be required either to (I) offer to repurchase the 6 3/4% preferred shares on the date that is 75 days after the company gives notice of the merger for their liquidation preference of $1,000 per share (or $50 per depositary share) plus any accrued and unpaid dividends or, if such offer is not made:
(II) Modify the conversion ratio applicable to the 6 3/4% preferred shares so that upon conversion the holders of the 6 3/4% preferred shares will have the right to receive an amount in cash equal to the liquidation preference of $1,000 per share (or $50 per depositary share) plus any accrued and unpaid dividends.” (CBB site)
There are two scenarios with the same outcome – They either redeem the preferred shares for $50 each, or they adjust the conversion rate, so that we receive $50.00 cash/preferred share.
CBB.PB pays $0.8438/share quarterly, and should go ex-dividend next on ~9/11/20. At $47.20, it yields 7.15%.
As the buyout is supposed to happen in the 1st half 2021, we used a date of 6/30/2021 to determine the total return, if you were to buy these shares at the current $47.20 price.
There will be $3.3752 in quarterly payouts prior to 6/30/21, plus the capital gain is $2.80/share, which adds up to a 13% total return:
This preferred series has a very small total annual payout of ~$10.5M. Cincinnati Bell’s free cash flow coverage was 3.13X in Q1-2 2020, vs. 3.46X in Q1-2 ’19:
CBB’s management uses the following non-GAAP free cash flow calculation, which deducts capex and preferred dividends from operating cash flow, and adds back one-offs, such as transaction and integration, and restructuring costs (please see the earnings section below for more info on those one-off costs).
CBB’s management has invested in fiber optics and cloud services, in the face of landline attrition and video cord cutting. Management made a big acquisition in 2018, buying Hawaiian Telecom and IT services provider OnX.
CBB delivers integrated communications solutions to residential and business customers over its fiber-optic and copper networks, including high-speed internet, video, voice and data. Cincinnati Bell provides service in areas of Ohio, Kentucky, Indiana and Hawaii. In addition, enterprise customers across the United States and Canada rely on CBTS and OnX, wholly-owned subsidiaries, for efficient, scalable office communications systems and end-to-end IT solutions.
Cincinnati Bell’s Earnings
CBB’s revenue held up pretty well in Q1-2 ’20, while its adjusted EBITDA rose ~4%. Its free cash flow slipped -9.4%.
A negative impact came from the much higher transaction and integration costs, which jumped to $31.60, mainly due to the termination fee of $24.8 million paid to an affiliate of Brookfield in Q1 2020, as well as restructuring and severance related charges related to the voluntary severance program (“VSP”) finalized in the three months ended March 31, 2020.
CBB’s Entertainment & Communications segment’s revenue slipped -3% in Q1-2 ’20, while its IT services & Hardware segment revenue rose 4%:
Debt and Liquidity
CBB’s credit revolver expires in October 2022. In Q2 2020, management was able to amend the receivables facility, by extending it to 2023, in return for decreasing from $225m to $200M. If CBB’s adjusted EBITDA continues at the same pace in the 2nd half of 2020, its total debt/adjusted EBITDA leverage will be 4.68X.
CBB had ~$142M in liquidity as of 6/30/20, including $7M in cash, and 135M available on its credit revolver.
We rate the CBB.PB preferred shares a BUY, based upon their attractive yield, the current capital gain potential from the Macquarie buyout, and the financial strength of Macquarie Group. Additionally, this is a tiny preferred float, which adds more security to its sustainability over the next year.
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Disclosure: I am/we are long CBB.PB, BIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.