Summary Investment Thesis
CBB is a misunderstood and complex event driven name with substantial upside and a large margin of safety. Sum?of the?parts analysis indicates 100%+ upside to shares from current levels with Cyrus One (data center segment) at REIT multiples, management is highly incentivized to unlock shareholder value, and catalysts to a re-rating look to be near term in nature (data center partial IPO targeting Q4’12). Note full separation of entities likely still 18 – 24+ months away.
What the Market Sees: Negative Optics Cause For Depressed Investor Sentiment
1. Legacy Telecom Space Under Pressure – Sellside and investment community is well aware of secular operational pressures as customers “cut the cord” and investors have gotten burned badly by several large blowups (2 yr. Share Performance “Peak to Trough”: FTR down 67%, FRP down 85%, ALSK down 85%).
2. Highly Levered – Levered at ~5x EBITDA.
3. No dividend – One of the only legacy telecom names globally not to offer a dividend.
4. No FCF – Again, a rarity in the telecom space and FCF is a key metric investors follow.
5. Orphan Stock – No natural shareholder base or comps for a company that is a mix of both legacy converged telecom operations and high?growth carrier?neutral premium colocation data center facilities. a. Natural shareholders of ILEC / wireless and Colo are very different. Telecom investors accept revenue declines but place a huge amount of emphasis on 1) FCF and 2) return of capital to shareholders via dividends. Meanwhile, data center investors likely aren’t paying attention to CBB and / or don’t have an interest in owning the legacy telecom business (majority of revenue and earnings today).
6. History of Bad Capital Allocation / Style Drift – Failed investment into Broadwing (nationwide fiber backbone network) at height of late 90’s TMT bubble burned investors and left CBB saddled with $2.5B of debt after selling it for far less several years later.
7. Exit of Large Shareholder – Peninsula Capital Advisors went from CBB’s largest holder at 6/30/11 to zero shares at 12/31/11.
8. Little Enthusiasm from Sellside – Of 10 well?followed sellside brokerages that cover CBB, only 3 rate as a “buy.”
9. “Say on Pay” – Another recent negative headline. Company was one of only 45 last year whose compensation package to executives was not approved by shareholders.
H/T Curry Goat