Cincinnati Bell Spins-off Convergys

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Cincinnati Bell has registered with the Securities and Exchange Commission for a spin-off and initial public offering of Convergys, the proposed name for an entity that would marry the company's subsidiaries Matrixx and Cincinnati Bell Information Systems Inc.

The move follows Cincinnati Bell's acquisition in February of AT&T's Customer Care Division for $625 million. The company, formerly known as American Transtech Inc., was folded into Matrixx Marketing whose client list includes American Express, Gateway International, Lucent Technologies Inc., and AT&T, which had inked an 8-year contract for services with Matrixx as part of the Transtech sale.

The proposed spin-off and IPO, which is expected to raise $425 million, will undergo an SEC review during the next month. Proceeds will pay down some $725 million in debt the group will bear as part of the debt incurred by Cincinnati Bell to fund the Transtech acquisition. The debt allocation directly alleviates Cincinnati Bell from more than 75 percent of its existing $1.1 billion in debt incurred as of March 31.

Convergys would bridge Matrixx and CBIS into what investors hope will be a high-tech, high-growth company with Cincinnati Bell remaining a more focused telecommunications company. Convergys would be comprised of Matrixx and CBIS, which would subsequently be renamed Convergys Teleservices Group and Convergys Information System Services Group, respectively.

Operating under Convergys, the Teleservices Group would continue to specialize in customer management solutions designed to increase customer satisfaction and retention. The Information System division would continue its focus on billing and customer management needs, particularly in the area of wireless communications.

Combined, Convergys would aim "to develop long-term strategic relationships with clients...with complex billing needs or intensive customer service requirements," according to the prospectus.

"Telemarketing has historically been a lumpy business because it is project oriented," said Hampton Adams, a research analyst with Furman Selz LLC., an investment bank. "Once the projects end the revenues end. The billing part is a data processing engine and Cincinnati Bell wants to position the two as a complete, integrated services company.

"Cincinnati Bell has always had a tough time positioning itself in the investment community as to whether it is a telecommunications company or high-growth tech company," Adams said. "They want to be understood easier in the investment community."

Cincinnati Bell said it is likely to post lower-than-expected earnings for its second quarter, ending June 30. Matrixx and CBIS business units are expected to generate revenues slightly below first-quarter levels, due to seasonal and client-specific factors, the company said in a statement that was released with news about the SEC registration. The company's reliance on outsourced assignments subjects it to unreliable earnings, industry observers said.

"The telemarketing side, the Matrixx side has historically has been lumpy from quarter to quarter," Adams said. "The acquisition of Transtech makes Matrixx by far the largest teleservices firm. In this case such size matters because it helps even it out. It didn't happen this quarter but in time it will."

A Cincinnati Bell spokesman said the idea of Convergys was not even in the development stages when the company acquired Transtech.

The divisions would be headed by David Dougherty, currently the president and chief executive of Matrixx, who would be renamed president, Convergys Teleservices Group; and Robert Marino, currently the president and chief executive of CBIS, who would be renamed president, Convergys Information System Services Group.

Convergys Corp., would be led by chairman, Charles Mechem, who would also continue to serve as chairman, Cincinnati Bell; and James Orr, currently Cincinnati Bell's chief operating officer who would serve as president and chief executive officer of the newly formed organization.

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