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Cincinnati Bell barely rings his chimes


Dear Mr. Berko:  I have an $8,000 certificate of deposit coming due this month, and I’m sick and tired of getting 2 percent to 2.5 percent. Please tell me about Cincinnati Bell common stock, which sells for $4.05 a share. I would purchase 2,000 shares if you think this company might pay a dividend in the near future as earnings get better.  All I want is a 2 percent to 3 percent yield as I hold the stock for three to five years while I wait for appreciation.  V.A., Elkhart, Ind.

Dear V.A.:  Cincinnati Bell Inc. (CBB-$4.05) was acquired by ICX Communications in 1999, when revenues were $1.3 billion and the common stock was trading between $41 and $37 a share. In the hubris of the times, new management arrogantly changed the name to Broadwing Communications (an idiotic name for a once classy pale-blue-chip phone company) to reflect the scope of its potential growth.

The managers (who were in awe of their self-reverence) believed they could provide service on a national level by combining a national optical network with CBB’s local network and Internet expertise while selling the special prestige of the well-known Bell name. Well, they failed ignominiously and very nearly bankrupted a fine phone company that had been serving Cincinnati and environs for more than 75 years. The Broadwing people drenched this once-venerable company with bright red ink.

So in February 2003, after billions of dollars in losses, Cincinnati Bell finally disgorged itself of the dastardly Broadwing disaster, returned to its local-carrier roots and took back its estimable name.

Most of CBB’s estimated 2004 revenues of $1.3 billion derive from its local communications operations in a 2,400-square-mile area in southern Ohio. CBB has nearly 1 million lines in service, which is down a bit from 2002, and also owns an 80 percent interest in AT&T Wireless (18 percent of revenues), which serves the Cincinnati/Dayton corridor. This unit provides services over a digital wireless network and connects with AT&T’s PCS national network for calls outside its service area. Once the sale of AT&T Wireless to Cingular is completed, CBB will be rolling out its seamless GSM wireless network.  CBB’s public pay phones, its directory, its ZoomTown high-speed Internet access service and Any Distance long-distance service account for about 7 percent of this year’s revenues. The company’s commercial business, which provides service for large corporate customers, will contribute to the remainder of its $1.3 billion in 2004 revenues.

The company has a long road to recovery. Long-term debt of $2.1 billion exceeds revenues by nearly 60 percent. CBB’s cash position could be a lot more flexible, though its cash flow may be a healthy $1.05 a share this year. There are 245 million shares outstanding, and CBB might earn 15 cents a share this year and perhaps 30 cents in 2005. Net profit margins for 2004 may come in at 3.8 percent and are expected to improve to 6.9 percent in 2005.

Management will be also focusing its efforts on reducing debt by some $200 million over the next few years, so I don’t expect any dividend payments for some time to come.

I think CBB has some worthwhile appreciation potential over the next three to five years, and the shares could move between $7 and $9. However, CBB’s huge debt overhang will tend to stifle the enthusiasm of most institutional investors. So I can only give you a modest “yes” on the common stock. I wouldn’t call CBB an investment, but it might be a good speculation.

I’m much more enthusiastic about CBB’s 6.75 percent Series B cumulative convertible preferred stock (CBB PRB-$40.51), which pays a dividend of $3.375 for a return of 8.3 percent. It is convertible into 1.442 shares of CBB common stock at the holder’s option and is callable at $50 at the company’s option.

So here’s what I recommend: rather than buy 2,000 shares of the common stock that doesn’t and won’t pay a drachma in dividends, purchase 1,000 shares, which will cost you $4,050. Then with another $4,050 or so, purchase 100 shares of CBB PRB. You will have an $8,100 investment that will give you a 4.2 percent return with some decent upside potential. And that beats any yield you can get on today’s CD by a mile.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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