Cincinnati Bell Inc. said it will separate its billing and customer-management businesses into a new subsidiary and then spin it off in a tax-free distribution to Cincinnati Bell shareholders after taking the company public in May.
The company also announced John T. LaMacchia, Cincinnati Bell’s president and chief executive officer, will retire after overseeing the separation of the company.
Cincinnati Bell Information Systems, the company’s billing and customer-care operation, and Matrixx Marketing, which provides outsourced customer-management services, will combine to become Converges Corp. The new subsidiary also may hold Cincinnati Bell’s minority interest in a cellular partnership.
Following the spinoff, Cincinnati Bell will be left with its local telephone service operation in Cincinnati, long-distance services, yellow pages and directory services and telecommunications equipment businesses. The company said its goal for both companies is to have the financial flexibility to be successful.
“We have concluded that CBIS and Matrixx Marketing will be better positioned to grow through a company focused solely on transforming the customer knowledge they share into competitive advantages for the client companies they serve,” said LaMacchia.
When asked earlier this year whether the company would consider spinning off the two subsidiaries, LaMacchia said, “When we look at any strategic issue, including the structure of our business, the fundamental issue is the same: how to generate the highest long-term shareholder return on all of our assets.”
Cincinnati Bell’s information services and teleservices businesses in the last two years have grown larger than its core communications services business in terms of revenue. During 1997, CBIS and Matrixx contributed $995.6 million to the company’s revenues, while the communications services segment contributed $834.5 million.
Together, CBIS and Matrixx accounted for more than 80 percent of Cincinnati Bell’s first-quarter revenue growth and 46 percent of its operating income growth this year.
The company’s ratings, however, came under scrutiny late last year following the announcement that Matrixx would purchase Transtech for $625 million. Duff & Phelps Credit Rating Co., Moody’s Investor Service Inc. and Standard & Poor’s Corp. each placed the company under review for possible downgrade. The credit ratings firms cited Cincinnati Bell’s strategies for financing the acquisition, the near-term dilative effect on cash flows and the increased business risk as reasons for the review.
Early this year, Moody’s lowered the senior unsecured debt ratings of the company, saying the acquisition of Transtech and a planned investment in a personal communications services network with AT&T Wireless Services Inc. could result in a negative impact on financial performance over the immediate term and could result in significant external financing requirements. Likewise, S&P lowered its ratings on the company’s senior unsecured debt and corporate credit rating to reflect the increased business risk and higher degree of financial risk associated with expansion into the outsourced marketing industry.
Following the latest announcement, S&P affirmed its ratings of Cincinnati Bell, while Moody’s placed its debt ratings on review for possible downgrade.
“The ultimate spinoff of CBIS and Matrixx, if accomplished, would substantially enhance the business risk profile of (Cincinnati Bell), given the stability and strength of the company’s local telephone business, which would comprise most of the remaining business mix, supplemented with long-distance telephone, directory publishing, telephone supply and PCS operations,” said S&P analyst Cathy Cosentino. “However, uncertainty remains as to (Cincinnati Bell’s) post-spinoff capital structure, which would depend on the level of debt transferred to the spun-off entity, Converges.”
Cincinnati Bell said it plans to file a registration statement with the Securities and Exchange Commission next month for an initial public offering of Converges shares. Although the percentage of shares to be issued has not yet been determined, the company said it expects it to be in the range of 10 percent to 15 percent.
Cincinnati Bell said it expects the IPO to be completed this summer and the spin-off distribution several months later.
The company said it expects to appoint James Orr, currently chief operating officer of Cincinnati Bell, president and CEO of Convergys. Matrixx President and CEO David Doughterty, and CBIS president and CEO Robert Marino, will report to Orr, said Cincinnati Bell.
