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Activist shareholder 'skeptical' about Cincinnati Bell expansion to Hawaii

Bell: Proxy fight won't delay acquisition
Posted: 9:05 AM, Mar 14, 2018
Updated: 2018-03-14 13:49:02Z

CINCINNATI -- Activist shareholder Mario Gabelli hasn’t offered much detail on changes he’d like to see at Cincinnati Bell Inc., but it’s probably safe to count him as a critic of the company’s planned expansion to Hawaii.

In a preliminary proxy statement to Cincinnati Bell shareholders on March 9, Gabelli revealed that he is seeking three board seats because he has doubts about the $650 million acquisition of Hawaiian Telcom Inc., which was announced last July. Cincinnati Bell expects to finalize the transaction in the second half of this year. It says Gabelli’s opposition will have no impact on that timeline.

Gabelli’s GAMCO Asset Management Inc. owns about 11 percent of Cincinnati Bell shares. It has nominated James Chadwick, Matthew Goldfarb and Justyn Putnam as directors, arguing that more oversight is needed on behalf of shareholders.

“GAMCO is skeptical about the potential synergies and/or benefits that come from a telecommunications company in Hawaii, particularly in light of opportunities in other locations where returns and investment opportunities are more favorable,” Gabelli’s filing states. “In addition, GAMCO believes that the Company suppressed the voice of its shareholders by structuring the transaction in such a way that the shares issued as part of the transaction did not exceed 20 percent of the voting power outstanding; which would have triggered the shareholder approval requirements of NYSE Rule 312.03(c).”

Cincinnati Bell rejected Gabelli’s criticism in a prepared statement that stressed the deal is part of a strategy to reshape the traditional phone company into a national provider of fiber-optic services.

“We have a long history of regular and substantive engagement with our shareholders,” said spokesman Josh Pichler. “Any potential proxy contest won’t affect the closing of the deal.”

Because Hawaiian Telcom shareholders have already approved the merger, “I don’t think GAMCO would push to derail the Hawaiian deal,” said Victor Lassandro, senior portfolio manager at the Downtown-based investment advisory firm Riverpoint Capital Management.

But Cincinnati Bell is also digesting the $201 million acquisition of a Canadian IT company, OnX Enterprise Solutions. Its shares are down 29 percent this year to $14.95. In February, the company fell short of analyst expectations on revenue and profits.

The company “released financial targets for 2018 that were below Wall Street’s expectations,” Lassandro added. “The recent price action suggests investors have grown skeptical about the company’s ability to successfully integrate two major acquisitions.”

Gabelli seemed to voice support for the transaction when it was first announced. But he also questioned Cincinnati Bell CEO Leigh Fox about the deal’s structure, saying the company could borrow less if it issued more stock.

“How much of the focus was on limiting the number of shares,” Gabelli asked Fox last July, “so you wouldn’t have to have Cincinnati Bell shareholders vote?”

Fox said that was not the focus of the deal’s structure. “Honestly, it was just cheap money and keeping our leverage down and limiting the impact on our shareholders,” he said.

Gabelli said he would have “no problem voting on the deal” and did not challenge the company’s estimate that it would achieve “cost synergies” of $11 million from the Hawaiian Telcom acquisition. The company said the deal would increase cash flow and better enable it to pay down debt.

“Good luck and good work,” Gabelli told Fox at the time.

GAMCO declined to answer questions about its recent filing.

Cincinnati Bell has urged shareholders to reject Gabelli’s director nominees, saying they “lack appropriate qualifications” and “relevant industry experience.”

The nominees range in age from 37 to 46, much younger than Cincinnati Bell’s existing nine board members, with an average age of 64 years.

One of Gabelli’s nominees, Matthew Goldfarb, has extensive experience in debt restructuring and bankruptcy proceedings. Nominee Justyn Putnam served on the board of Stanley Furniture Inc., which struggled for years against Asian importers before agreeing to sell its assets in 2017 to Churchill Downs LLC, a private company linked to the Vietnam Trade Alliance. A third Gabelli nominee, James Chadwick, has worked for various investment funds known for actively promoting change in the companies in which they invest.