Analysts used words like “reasonable” and “sensible” to describe the sale of wireless assets by Cincinnati Bell Inc. Monday.
Unloading its shrinking cell phone unit, they say, helps the company emphasize other products with more growth potential: Business and residential services that can be delivered over high-speed fiber optic networks.
But at least one financial writer thinks the strategy could end with Bell being gobbled up by a larger national rival.
“They are a small and cheap company with the infrastructure that Google could use,” said Brian Nichols, a Northern Kentucky resident and author of the 2013 book, “Taking Charge with Value Investing.”
WCPO Insider takes a deeper look at the transaction announced Monday and why it puts Cincinnati Bell on a collision course with Google Inc.
CINCINNATI - Analysts used words like “reasonable” and “sensible” to describe the sale of wireless assets by Cincinnati Bell Inc. Monday.
“They are a small and cheap company with the infrastructure that Google could use,” said Brian Nichols, a Northern Kentucky resident and author of the 2013 book, “Taking Charge with Value Investing.” Nichols wrote two recent columns for the investment site, Motley Fool, on disruptive potential of Google Fiber, a high-speed data network that Google is building 34 cities.
“My theory is that Google will buy undervalued companies like Cincy Bell to save on the mounting costs of buildouts, which could top $30 billion,“ Nichols wrote in an email to WCPO.
Cincinnati Bell wouldn’t comment on that theory. Instead, the company emphasized the deal’s ability to help Bell focus on fast-growing services like Fioptics, a cable TV competitor that generated $100 million in revenue for Cincinnati Bell in 2013.
“We plan to be a dominant video provider,” said Mike Vanderwoude, senior vice president for wireless markets at Cincinnati Bell. “We’ll have fiber to many homes. We’ll have high-speed Internet service to many homes. On the business side, we will be a fiber carrier here in this market and we’re expanding to other markets as well with telco services as well as our IT consulting service and our new cyber security service.”
Cincinnati Bell said Verizon Wireless will pay $210 million for its wireless spectrum licenses and related assets in a deal that’s expected to close in the second half of 2014. Cincinnati Bell will try to retrain and reassign its 175 wireless employees but Vanderwoude said job reductions are a possibility after the sale.
Telecom analyst Nicholas Puncer said the deal could trigger a new round of price competition in the local cell phone market, as Cincinnati Bell’s 340,000 cell phone customers look for other options.
“If you look at the value or the price that various telecom providers charge, Verizon is definitely on the higher end of things,” said Puncer, analyst at Bahl & Gaynor Investment Counsel. “They’ve invested a lot of capital in their network and they have a pretty distinct advantage over the likes of AT&T and others. With T-Mobile being aggressive on their pricing, you might see people going to that if they’re more price-sensitive.”
Cincinnati Bell said proceeds of the wireless transaction will be used to pay down some of its $2.3 billion debt or fund other corporate initiatives.
The company is spending more than $80 million to expand its Fioptics service in the Tri-State this year. Vanderwoude said the company has already spent about $300 million on Fioptics and could spend between $500 million and $600 million by the time the network is fully constructed three to five years from now.
“It’s a reasonable strategy,” Puncer said. “There’s only going to be more data going through networks in the future, not less. The way we consume content is going to be a lot different 10 years from now than it is today. This is their effort to be on the right side of that, giving people more options to receive that content.”
But Cincinnati Bell could face a major threat to that strategy if Google Fiber selects Cincinnati as an expansion market. Cincinnati Councilman P.G. Sittenfeld recently announced an effort to recruit the service to Cincinnati. Financial writer Brian Nichols thinks Cincinnati is too big a market for Google to ignore.
And Google may be too big a company for Cincinnati Bell to compete against. The market value of its stock is $361 billion, about 470 times that of Cincinnati Bell.
“Google has an unprecedented luxury,” Nichols said in his email to WCPO. “They are snapping Fiber to existing poles owned by AT&T (and other telecom companies), and then targeting areas where consumers agree for service before the network is even built. Given this demand, and its mere ability to operate in such a manner, I do think Cincinnati Bell will have major problems once that day comes (likely sooner rather than later). In fact, I don't think they stand a chance of competing against Google.”
Cincinnati Bell can deliver data services at similar speeds to Google Fiber, Vanderwoude told WCPO Monday.
“We will compete with them,” he said. “We’ll welcome them.”
Vanderwoude said Cincinnati Bell enjoys a very loyal customer base and benefits by being a local provider.
“We believe customers have an affinity with us because of the great
services we provide,” he said. “But at the end of the day, the products have to compete head to head and that’s what Fioptics (does), delivering the high speed and great video service that the customers are asking for.”
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