Telcos Move to Strengthen Balance Sheets

In a previous post, we discussed four market forces that weigh heavily on every telco’s strategic thinking. In particular:

• Customers demand high connection speeds to satisfy their ever-increasing appetite for bandwidth-hungry services, e.g. video and gaming.
• An aging telco infrastructure requires significant capital investment to meet customer demand.
• The competition is taking a bite out of a previously stable customer base while simultaneously making it difficult to hold pricing to profitable levels.
• Government regulation exerts a major influence on telco operations and pricing constructs. [Note: The ripple effect of the FCC’s recent ruling regarding broadband services has yet to be felt across the industry.]

While it’s generally good news that customers “feel the need for speed,” the pressure is on to bolster the network infrastructure to supply the requisite connection speeds. Such investments have typically been made through generous use of debt financing. Unfortunately, the telecom sector already has the highest debt-to-equity ratio of any non-financial sector. This circumstance could prove perilous should credit markets tighten and/or interest rates rise.

Cincinnati Bell tackled this situation in 2014. Fiber optics is one of the company’s fastest-growing business units. Annual revenue equaled $140 million, up 40 percent year-over-year since 2012. As of year-end 2014, the company reached 40 percent of customers and set its sights on 80 percent penetration by year end 2016. So how did the company finance its network build-out to bring fiber to all of these households?

Management took two bold actions to strengthen the company’s balance sheet and thereby establish a solid base from which to manage growth. In June 2014, the company sold a portion of its partnership interest in Cyrus One, a global enterprise data center and co-location provider, for $356 million in cash. Cincinnati Bell retains a 46.9% interest in the business. In late September 2014, the company sold its wireless business to Verizon Wireless for $210 million. Proceeds from both sales helped Cincinnati Bell pay down its debt. Happily, Cincinnati Bell met Wall Street’s expectations on $1.1 billion in 2014 revenues.

In February 2015, Alaska Communications followed Cincinnati Bell’s lead by selling off its wireless assets to General Communication. Net proceeds from the sale will be used to pay down debt. This move will position the company to focus on its broadband business and managed IT solutions services. According to Alaska Communications President and CEO Anand Vadapalli, both of these business units offer the potential for significant revenue growth and attractive profit margins.

Of course, asset sales have their own challenges. By shedding its wireless businesses, the company does not have the means to maintain the landline “defectors” under the same roof. The company also loses flexibility in creating bundled service offerings that encourage customers to consolidate their vendor relationships. Yet the benefits appear to outweigh the costs. Rather than struggle to maintain a competitive stance on multiple fronts, both Cincinnati Bell and Alaska Communications committed to service offerings in which they have the best chance of maintaining their advantage.

Are you looking to restructure your balance sheet? Contact us to consider your options and establish criteria by which you could consider deleveraging through divestiture.