Avista Capital-backed WOW! Pays 2.9x Revenue in Deal

After six months of a relatively quiet cable M&A market, WideOpenWest, LLC (WOW!) broke the silence with its $1.5 billion acquisition of Georgia-based Knology last week. It was just a year ago that the Denver-based WOW! was considered one of the front runners to land Insight Communications when it was on the block, but Time Warner swooped in to acquire Insight at the last minute. This time around, WOW! sealed the deal—agreeing to acquire all outstanding shares of Knology for $19.75 a piece, in one of the largest cable deals of the past few years.

The cash portion of the deal comes to around $750.3m, which combined with Knology’s $744.6m in outstanding debt leads to the announced transaction value of approximately $1.5b. WOW!’s press release indicates that the deal was structured as a merger agreement under which a subsidiary of WOW! will acquire Knology for cash.

Through the deal, WOW! acquires Knology’s customer base which is located primarily in the Southeastern U.S. In addition to its operations in Florida, Georgia, Tennessee and South Carolina, Knology also has smaller service areas in Minnesota and Iowa. Knology’s customers account for over 794k voice, video and broadband connections. The acquisition largely expands WOW!’s service footprint, which is currently contained largely to the Midwest.  WOW!’s networks pass 1.6m households in Illinois, Indiana, Ohio and Michigan. Post-close, the combined companies will serve approximately 800k broadband, television and voice customers.

While Knology is widely viewed as a cable operator, both telephone and Internet subs actually account for larger portions of its service mix than television subs (on a connection basis).  Its business model is largely built around bundling; with over 80% of its customers opting for two or more services.  The similarity of penetration levels for Knology’s various service offerings further bears out its emphasis on bundling. As of December 31, penetration for video, broadband and telephone at Knology was 23.6%, 24.1% and 25.4%, respectively.  WOW! also pushes triple play packages in its Midwest service areas, offering deep discounts for customers selecting multiple services, making Knology a logical acquisition target.

Although WOW! announced the acquisition on April 18, rumors of a Knology deal had been floated as early as February. A Wall Street Journal report on February 28 indicated that Knology had put itself on the block, and a Dow Jones story a month later identified WOW! and its private equity backers Avista Capital as the most likely buyers for the cableco.

Given the public nature of Knology’s vetting, WOW! paid a premium of just 7% compared to Knology’s recent trading high of $18.51. Wall Street factored a takeover bid into Knology’s price when acquisition rumors first surfaced, as Knology’s stock price jumped 10.5% on the day of the WSJ’s initial report. The $19.75 price per share paid by WOW! however represents a more sizable 34% premium compared to Knology’s average share price in the three months prior to the deal rumors being made public.

Turning to transaction multiples, WOW! paid 2.9x revenue and 8.4x trailing cash flow for Knology--levels in line with the bigger cable deals we observed in 2011, but slightly above recent overall cable averages. Time Warner paid similar price tags of 2.8x revenue and 9.4x trailing OIBDA for Insight and 2.8x revenue for systems it acquired from NewWave in 2011. Last year however, cable M&A was largely characterized by smaller “tuck-in” and “edge-out” acquisitions, and the average observed deal multiples were down around 1.9x revenue and 8x cash flow.

At $1,887 per connection, WOW! paid less per connection for Knology than Time Warner paid for Insight ($1,981/conn) and NewWave ($2,000). Though, given the differing service mixes offered by the acquired entities, connection multiples are not always direct comparisons. Knology’s average revenue per connection was also lower compared to Insight and NewWave, which is logical given its emphasis on bundling at discount prices.

WOW! has not yet indicated the synergies it expects to gain with its purchase of Knology, leaving us without a clear pro forma cash flow multiple for the deal. According to Knology’s 2011 annual report, the company maintains around $598k in usable state and federal net operating loss carryforwards which WOW! can utilize, however this amount is relatively immaterial compared to Knology’s $1.5b price tag.

With Knology off the block, there still remains at least one sizable cable deal on the table. Wave Broadband—which along with WOW! acquired the bankrupted Broadstripe’s cable assets in 2011—is reportedly shopping itself to multiple private equity firms, eyeing a bid in the $1b range. Avista Capital is at least one private equity firm investing heavily in cable in this market--we should find out soon if others are going to follow suit.