Mergers and Acquisitions

Merger of Hawaiian Telcom Holdco, Inc.

On July 2, 2018, the Company acquired Hawaiian Telcom for cash consideration of $218.3 million, stock consideration of $121.2 million and debt repayments, including accrued interest, of $318.2 million. Hawaiian Telcom is the ILEC for the State of Hawaii and the largest full service provider of communication services and products in the state. With the merger, the Company gains access to both Honolulu, a well-developed, fiber-rich city, as well as the growing neighboring islands. The companies' combined fiber networks are nearly 16,000 fiber route miles.

The purchase price for Hawaiian Telcom consisted of the following:



(dollars in millions)
Cash consideration plus debt assumed	$	536.5
Cincinnati Bell Inc. stock issued	121.2
Debt repayment	(318.2		)
Total purchase price	$	339.5

In order to fund the merger, the Company utilized proceeds of $350.0 million from the 8% Senior Notes due 2025 ("8% Notes"), $16.5 million of the cash that was previously restricted to fund interest payments on the 8% Notes, drew $35.0 million on the Revolving credit facility and $154.0 million on the accounts receivable securitization facility (see Note 6). In conjunction with the merger, the Company issued 7.7 million Common Shares at a price of $15.70 per share as stock consideration. The Company recorded a total of $23.6 million in acquisition expenses related to the merger of Hawaiian Telcom, of which $13.3 million and $16.9 million were recorded in the three and nine months ended September 30, 2018, respectively and $5.3 million and $5.7 million were recorded in the three and nine months ended September 30, 2017, respectively. These expenses are recorded in "Transaction and integration costs" on the Condensed Consolidated Statements of Operations.

Acquisition of OnX Holdings LLC

On October 2, 2017, the Company acquired 100% of OnX Holdings LLC ("OnX"), a privately held company that provides technology services and solutions to enterprise customers in the United States, Canada and the United Kingdom. The acquisition extended the IT Services and Hardware segment's geographic footprint and accelerates its initiatives in IT cloud migration.

The purchase price for OnX consisted of the following:



(dollars in millions)
Cash consideration plus debt assumed	$	241.2
Debt repayment	(77.6		)
Working capital adjustment	2.8
Total purchase price	$	166.4

The cash portion of the purchase price was funded through borrowings under the Credit Agreement (see Note 6). The cash consideration includes $77.6 million related to existing debt, including accrued interest, that was repaid in conjunction with the close of the acquisition. In addition, a working capital adjustment of $2.8 million was paid in the first quarter of 2018. The Company recorded $8.6 million in acquisition expenses related to the OnX acquisition, of which no expense was recorded in three months ended September 30, 2018 and $0.5 million was recorded in the nine months ended September 30, 2018. Acquisition expenses for the three and nine months ended September 30, 2017 were $4.4 million and $5.5 million, respectively. These expenses are recorded in "Transaction and integration costs" on the Condensed Consolidated Statements of Operations.

Purchase Price Allocation and Other Items

The determination of the final purchase price allocation to specific assets acquired and liabilities assumed is incomplete for the Hawaiian Telcom transaction. The purchase price allocations, based on fair value estimates, may change in future periods as customary post-closing reviews are concluded during the measurement period, and the fair value estimates of assets and liabilities and certain tax aspects of the transaction are finalized.

The purchase price for OnX and Hawaiian Telcom have been currently allocated to individual assets acquired and liabilities assumed as follows:



(dollars in millions)	Hawaiian Telcom		OnX
Assets acquired
Cash	$	4.3	$	6.5
Receivables	25.7		69.9
Inventory, materials and supplies	6.9		9.0
Prepaid expenses and other current assets	5.9		2.8
Property, plant and equipment	701.8		11.6
Goodwill	7.6		133.1
Intangible assets	52.0		134.0
Deferred income tax asset	44.3		1.4
Other noncurrent assets	2.1		1.8
Total assets acquired	850.6		370.1
Liabilities assumed
Accounts payable	58.0		63.6
Current portion of long-term debt	10.2		1.3
Unearned revenue and customer deposits	13.5		—
Accrued expenses and other current liabilities	21.6		18.3
Deferred income tax liabilities	—		42.3
Long-term debt, less current portion	304.5		76.7
Pension and postretirement benefit obligations	68.9		—
Other noncurrent liabilities	34.4		1.5
Total liabilities assumed	511.1		203.7
Net assets acquired	$	339.5	$	166.4

During the first quarter of 2018, the Company recorded a purchase price allocation adjustment for OnX in the amount of $0.2 million to "Goodwill" related to the payment of the working capital adjustment. Also in the first quarter of 2018, the Company recorded purchase price allocation adjustments of $0.1 million to "Deferred income tax liabilities" and $0.4 million to "Other noncurrent liabilities" related to the finalization of certain tax aspects of the OnX acquisition. The offset of these adjustments were recorded as an increase to "Goodwill."

The revenue and net loss of Hawaiian Telcom included in the Condensed Consolidated Statements of Operations from the acquisition date through September 30, 2018 was $87.1 million and $0.5 million, respectively.

The estimated fair value of identifiable intangible assets and their estimated useful lives are as follows:



	Hawaiian Telcom			OnX
(dollars in millions)	Fair Value		Useful Lives	Fair Value		Useful Lives
Customer relationships	$	26.0	15 years	$	108.0	15 years
Trade name	26.0		15 years	16.0		10 years
Technology	—		—	10.0		10 years
Total identifiable intangible assets	$	52.0		$	134.0

Identifiable intangible assets are amortized over their useful lives based on a number of assumptions including the estimated period of economic benefit and utilization. The weighted-average amortization period for identifiable intangible assets acquired in the OnX acquisition and Hawaiian Telcom merger is 14.3 years.

The goodwill for OnX is attributable to increased access to a diversified customer base and acquired workforce in the United States, Canada and the United Kingdom. The amount of goodwill related to OnX that is expected to be deductible for income tax purposes is $2.3 million.

Pro Forma Information (Unaudited)

The following table provides the unaudited pro forma results of operations for the three and nine months ended September 30, 2018 and 2017 as if the acquisition of OnX, and the merger of Hawaiian Telcom, had taken place as of the beginning of fiscal year 2016 and 2017, respectively. These proforma results include adjustments related to the financing of the acquisitions, an increase to depreciation and amortization associated with the higher values of property, plant and equipment and intangible assets, an increase to interest expense for the additional debt incurred to complete the acquisitions, and reflects the related income tax effect and change in tax status. Revenue has been retrospectively adjusted for the adoption of ASC 606 to reflect hardware revenue in the Infrastructure Solutions category net of related cost of products. ASC 606 was not applied to the year ended December 31, 2017 for Hawaiian Telcom results because they utilized the modified retrospective method of adoption. Reported amounts for 2017 could be materially different if Hawaiian Telcom had adopted the standard using the full retrospective method of adoption.

The pro forma information does not necessarily reflect the actual results of operations had the merger or acquisition been consummated at the beginning of the annual reporting period indicated, nor is it necessarily indicative of future operating results. The pro forma information does not include any (i) potential revenue enhancements, cost synergies or other operating efficiencies that could result from the merger or acquisition or (ii) transaction or integration costs relating to the merger or acquisition.



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
(dollars in millions, except per share amounts)
Revenue	$	386.7		$	397.2		$	1,157.5		$	1,194.6
Net loss applicable to common shareholders	(20.3		)	(100.9		)	(57.0		)	(62.8		)
Earnings per share:
Basic and diluted loss per common share	$	(0.41	)	$	(2.02	)	$	(1.27	)	$	(1.26	)

Other Acquisition Activity

On February 28, 2017, the Company acquired 100% of SunTel Services ("SunTel"), a private company that provides network security, data connectivity, and unified communications solutions to commercial and enterprise customers across multiple sectors throughout Michigan for cash consideration of $10.0 million. Based on final fair value assessment and the finalization of the working capital adjustment, the acquired assets and liabilities assumed consisted primarily of property, plant and equipment of $0.4 million, customer relationship intangible assets of $1.2 million, working capital of $4.1 million and goodwill of $4.6 million. These assets and liabilities are included in the IT Services and Hardware segment.