Cableco Pays $13.8m for Tampa Bay Data Center Operator

Back in August, Knology president Todd Holt commented that strong cash balances put the company in a position to be active in M&A. Recently, his words were put into action. Knology announced on January 10 that it had acquired E Solutions, a Tampa Bay-based data center operator and colocation provider.  The Georgia-based cable MSO paid $13.8m cash in the transaction, becoming the most recent telecom provider to move into the data center space.

With the deal, Knology acquires a pair of data centers in Tampa, Florida.  Both properties, along with E Solutions’ corporate offices are located within the Park Tower Building at 400 North Tampa Street.  The exact amount of colocation space within E Solutions’ facilities is unknown, however its data centers are located on the 7th, 8th and 10th floors of Park Tower.  The facilities feature 24x7 security, web-based monitoring and network redundancy as Level3, Bright House Networks, Cogent and Fibernet are all connected to the site.

The acquisition of E Solutions marks Knology’s first venture into data centers/colocation and will provide the cable operator with an added revenue stream.  The company maintains approximately 800k video, voice and data connections in the Southeast, upper Midwest and Kansas regions. Knology’s business model has been built around bundling, and it consequently has a connection mix evenly split between television, voice and Internet. With strong penetration of its main three services among existing customers, there is little room to generate incremental revenue from its current customer base. Moving into data centers will allow Knology to attract more business customers leading to additional sources of revenue.

While there is no public information on E Solutions’ past financial performance, in its press release, Knology provided insight into the financial impact of the deal. The company stated that the acquisition would be immediately accretive to Knology on a levered free cash flow per share basis. It added that it expects tax benefits with an estimated net present value of $2.8m after fully amortizing the $13.8m purchase price.

Knology indicated that the deal is accretive to its cash flow multiple valuation after accounting for the $2.8m tax benefit. In recent weeks, the public has been trading Knology at approximately 7.5x cash flow.  Factoring the tax benefit into the purchase price, and using an OIBDA multiple of 7.5x as Knology’s baseline, we can estimate E Solutions’ generates just under $1.5m in OIBDA.  This would indicate a price tag—without accounting for the deal’s tax benefits—of around 9.4x cash flow for the deal.

While Knology has shifted course slightly with its data center purchase, the deal is consistent with its recent “tuck-in” strategy, through which it has targeted properties located nearby existing service areas. E Solutions’ data centers are just 20 miles away from Knology’s Pinellas Park cable system. The E Solutions purchase also does not imply that Knology’s appetite for cable deals has died down. It is rumored to be in talks to make another “tuck-in” cable acquisition of the Springfield, Florida system, which borders its Panama City cable footprint.