Cincinnati Bell is studying a spinoff or IPO for its thriving CyrusOne colocation business, the company said yesterday.
The move could allow Cincinnati Bell to benefit from investor interest in the data center and cloud computing sector, while shifting significant capital expenses off the telecom company's balance sheet.
Cincinnati Bell said it would take six to 12 months to make a decision on the best path for CyrusOne, with options including "a partial separation through a sale, initial public offering, or a full separation." Company officials said the analysis would examine which option created the most shareholder value.
“We expect our data center business to continue its significant growth, and the decision to consider structural, capital and financial alternatives demonstrates our commitment to maximizing this growth and maximizing value for our shareholders,” said Jack Cassidy, president and chief executive officer of Cincinnati Bell. “Our ultimate decision should highlight the value, strong performance, and growth prospects of our businesses while also focusing on opportunities to strengthen the balance sheet of Cincinnati Bell. While this process is underway, we will continue to execute on our existing strategies.”
Cincinnati Bell acquired CyrusOne in 2010 for $525 million, seeing colocation as a potential growth engine. The deal has paid off handsomely. In the fourth quarter, the CyrusOne colo business had revenue of $49 million, up 21 percent from the same period a year earlier. The company’s customers include 16 of the top global 100 companies and four of the top 10.
Building to Keep Pace With Demand
During the quarter, CyrusOne sold 43,000 square feet of data center space, while adding 27,000 square feet of space. The company now has a total of 763,000 square feet of space, which is 88 percent occupied.
That means that to continue growing the business, CyrusOne must continue building data centers. The company is currently working on data center expansion projects in Houston, Austin, Dallas, San Antonio and Phoenix. It has also opened facilities in London and Singapore.
Data center construction requires a significant amount of capital, and Cincinnati Bell says that one goal of its strategic review is "leaving Cincinnati Bell with an appropriate level of debt for its communications business."
Wall Street Likes Data Centers
Why consider a spinoff or IPO for CyrusOne? Data center stocks have done well on Wall Street in recent months, strongly outperforming telecom shares. Publicly-held colocation and managed hosting providers gaining between 14 and 26 percent in the fourth quarter, while shares of Cincinnati Bell (CBB) were flat.
CyrusOne is a separate legal entity, and has a distinct management team. Over the next six months, Cincinnati Bell’s management and board of directors will consult with its financial and legal advisers to explore "structural, capital and financial alternatives" for the data center business. The company said it doesn't intend to discuss its progress until the evaluation is completed.
While the company will evaluate alternatives, it said it could eventually decide to continue operating CyrusOne and not pursue any changes.