Knology is the latest cable company to test
the deal waters, hiring a pair of investment bankers to explore
its strategic alternatives, including a possible sale of
the West Point, Ga., triple-play overbuilder.
Sources confirmed a report in The Wall Street Journal
last week that said Knology was seeking a buyer. According
to sources in the investment community, Knology, encouraged
by a robust debt market and a handful of recent
cable deals, hired investment bankers Credit Suisse and
Bank of America Merrill Lynch to shop the company to
prospective purchasers.
News of a possible Knology sale sent its stock soaring.
On Feb. 28, Knology’s share price hit a new 52-week high of
$19.34 (up 22%, or $3.53) before settling down later in the
day to close at $17.47, up 10.5% ($1.66). The new 52-week
apex shattered the stock’s old high-water mark of $16.23.
A more measured upward slope continued on Feb. 29, a
2.1% (36 cents) gain to $17.83 per share.
TARGET: $1.5 BILLION
Knology is seeking as much as $1.5 billion for its assets,
representing about 8 times its 2011 cash flow of $187.1 million,
sources in the financial community told Multichannel
News.
That would be in line with some recent MSO deals: Insight
Communications and Bresnan Communications
were sold (to Time Warner Cable and Cablevision Systems,
respectively) for prices that valued the companies in cashflow multiples of 8.3 to 8.5.
Knology, though, is not expected to command that high
a price. Recent deals involving overbuilders are seen by financial experts as more comparable.
Take RCN’s $1.2 billion going-private deal in 2010, the
$270 million recapitalization of Grande Communications
in 2009 and this year’s $314 million sale of SureWest Communications
to Consolidated Holdings. RCN went private
at about 5.8 times cash flow, Grande recapitalized at about
7 times cash flow and SureWest was valued at about 6.5
times cash flow, experts said.
At those ranges, Knology could be valued between $1
billion and $1.3 billion.
Miller Tabak media analyst David Joyce — who downgraded
Knology to “neutral” from “buy” last week, after
the stock surpassed his short-term $17 target — said it
could be valued at $19 to $20 per share, or about 7.1 times
cash flow.
Knology has about 795,349 voice, video and data customers
in nine states (Alabama, Florida, Georgia, Iowa,
Kansas, Minnesota, South Carolina, South Dakota and
Tennessee).
The company reported revenue of $519.6 million and net
income of $48.3 million ($1.29 per share) in 2011.
GROWING TWO WAYS
Knology is considered well-run and in 2010 laid out a
plan to invest $100 million in extending its network to the
fringes of service territories. The so-called Edge Out program
has paid dividends: Knology added about 29,000 total
voice, video and high-speed data connections in 2011.
Knology has also been an aggressive buyer of systems.
In 2007 it bought PrairieWave Communications with
57,000 customers in South Dakota for $255 million and
later that year bought Dothan, Ala.-based Graceba Total
Communications (25,000 subscribers) for $75 million. In
2010, it bought Sunfl ower Broadband, with about 30,000
customers in Kansas, for $165 million.
