New Cincinnati Bell CEO Ted Torbeck wants to pay down debt, ramp up growth in fiber optics

Exclusive: Torbeck lays out Bell growth strategy

CINCINNATI - When Ted Torbeck holds his first earnings call next week as CEO of Cincinnati Bell Inc. , it will be a chance to articulate a new strategic vision for the telecommunications company that's been part of the local business community since 1873.

Don't expect any big surprises.

"For the next 12 months our focus is primarily going to be on Cincinnati, perfecting our products and gaining market share," Torbeck said in his first extensive interview since his promotion to the CEO seat Jan. 31.

Torbeck said the recent IPO of Cincinnati Bell's data center unit, Cyrus One, gives the company its best chance in years to reduce debt – he'd "like to get it under $1 billion"  – and invest in new growth initiatives. That's because Cincinnati Bell retained a 69 percent ownership stake in the new public company, an asset that's now worth more than $950 million.

But Torbeck isn't ready to make another big bet like the data center play his predecessor made with a $526 million acquisition of Cyrus One in 2010, or the ill-fated Broadwing investment that left the company with a 2.3 billion in debt load in 2004.

For at least the next year, Torbeck, a Moeller High School graduate with 25 years of management experience at General Electric Co., will focus on the fundamentals. He'll start with an expanded investment in fiber optics.

"We've got to grow market share in Cincinnati and fiber optics is the way to do it," Torbeck said in his new 12 th floor office in the Atrium II building downtown.

Torbeck said he would provide details of increased fiber-optics capital spending in the earnings call on Feb. 27. He told WCPO Digital that the company can achieve a six-fold increase to 300,000 residential customers for the high-speed Internet and high-definition television services that it has offered under the Fioptics brand name since 2008.

Expanding the brand means installing fiber-optic cables in more neighborhoods. The company spent more than $40 million to roll out the light-transmitting cable in 2012. Currently, Bell passes 184,000 homes with fiber-optic cables, with 28 percent market share. That means 52,000 homes are now Fioptics subscribers. Torbeck wants to reach 650,000 to 700,000 homes and make 50 percent of them Fioptics subscribers.

"We have about 25 percent of the city covered and we think from a financial perspective we can get to 65 or 70 percent," he said. "So, we've got significant growth opportunity there."

Such growth would put a dent in the Time Warner local subscriber base, estimated by Nielsen at 446,120. Time Warner spokesman Mike Hogan said the company is adding high-speed data and telephone customers locally.

"We've been thriving in a competitive market for years now. Competition isn't new to us," Hogan said.

As it gains more residential customers, Torbeck said Cincinnati Bell will target office parks and business clients with a suite of service enabled by high-speed cable, including cloud computing, enterprise email, call conferencing products and data backup.

"At some point in time, we'd like to expand regionally into Indianapolis, Columbus. Louisville is another opportunity. But that's probably a little down the road," Torbeck said. "From a fiber standpoint, we could look at acquisitions and get into metro fiber. These are things we're looking at, but these are things that are down the road. We got a lot of room for growth just here in Cincinnati."

For analysts, the big question for Cincinnati Bell is whether any of its new growth initiatives can outpace an expected decline in wireless and wireline, or traditional land-line services.

"Fioptics helps stabilize the core business, but secular trends may prove to challenging," wrote Morgan Stanley analyst Simon Flannery, in a Feb. 12 report in which he gave the stock an equal weight, or neutral rating. With no iPhone to offer its customers and no announced plans to build a faster LTE or 4G network for mobile phone users, Flannery expects Cincinnati Bell's wireless business to lose 200 basis per year in profit margins over time. He also predicts a 1.2 percent annual decline in wireline customers for Cincinnati Bell through 2018.

Other analysts have opined that Cincinnati Bell's $2.6 billion debt load (at the end of the third quarter) will make it difficult for the company to make necessary capital investments. Torbeck said Cincinnati Bell's debt will fall to $2.1 billion when quarterly results are announced Wednesday and he plans to sell Cyrus One shares to pay down additional debt after a one-year lockup period expires next January. How quickly Cincinnati Bell sells its shares will depend on Cyrus One's growth in 2013.

"We're measuring this very carefully. I don't want to leave too much on the table," Torbeck said.  "If the data center

business continues to grow in value, why wouldn't you keep it? If you don't need the money and your best investment is data center, that's a luxury I have, is to sit back and see what happens there. But I can tell you right now, we remain very bullish with the potential of that data center asset that we have."

In the meantime, Torbeck has the ability to borrow up to $200 million from an untapped revolving loan. He said the company generates $400 million in earnings before interest, taxes, depreciation and amortization, or EBITDA, money that can be used for capital investments. So, it has enough cash to invest in growth.

"We do have a fairly high dollar figure we're paying on interest, but liquidity is not the issue," he said.  "To get to where we need to be, we need to invest. We need to invest in the infrastructure and we need to invest in fiber optics."

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