Entries in Knology:KNOL (9)


Cable Deal Multiples Decline in 2011

Buyers Paid an Average of 1.9x Revenue and $2,286 Per Sub

In the first half of 2011, cable acquisitions were few and far between. Aside from a sprinkling of system sales, all was quiet on the cable M&A front. Then June hit, and with it came a flurry of deals, mostly mid-sized, involving both the larger cablecos and regional operators looking to edge-out their service areas. Year to date there have been 21 cable deals announced involving nearly 1.1m cable subscribers. Of the 21 transactions, there were 12 priced deals that totaled $3.58b.

Time Warner was the biggest and also one of the most frequent buyers in 2011, spending more than $3.26b on three acquisitions. It started off small in May, picking up a cable system in Ohio from CoBridge Communications, but then made the year’s two largest cable buys shortly after: a $260m systems purchase from NewWave in June, and its $3b acquisition of Insight in August. Time Warner picked up 826k subs in its 2011 deals, paying around $3975 per sub. For Insight’s 750k customers, it paid an average of $4,000 per sub, the steepest multiple observed during the year.

Another frequent visitor to the deal table has been Charter, involved in four separate deals in 2011. Much of Charter’s activity was centered on building a cluster of cable systems in a pair of Southeastern states. In March, Charter cut a deal to with Windjammer to acquire cable assets in Georgia and Alabama, and it later swapped systems in the same states with James Cable. Then, in July, Charter agreed to buy another Georgia cable system from Northland Cable. In total, Charter’s acquisitions were on a much smaller scale compared with Time Warner’s activity, as it netted only 26k subs overall.

While Time Warner and Charter were repeat buyers, there were two companies more than willing to take the other side of the deal in 2011. US Cable exited the cable business completely with a trio of system sales during the year; while CoBridge Communications unloaded a handful of its cable systems in three separate transactions, just months after it entered the cable space.

Backed by The Gores Group, CoBridge began investing in cable in October 2010, acquiring 36 systems from Charter for an undisclosed amount. The ink on that deal was barely dry before CoBridge sold off a portion of those same systems to Knology in February 2011 for $30m. Later in the year the company dealt more cable assets to NTS Communications and Time Warner. While CoBridge’s strategy upon entering the cable business was to acquire undervalued, turnaround properties, the company may have bought into the industry at an inopportune time.

A comparison of deal multiples from 2011 to 2010 indicates that values in the cable industry have dropped off this year. The average revenue multiple we have observed for deals announced in 2011 has been around 1.9x, compared to an average price tag of 2.8x revenue for cable deals announced in 2010. Prices have fallen off about 23% on a per sub basis as well in 2011. Buyers on average have paid $2,286 per cable subscriber this year, compared to $2,976 per sub in 2010 cable deals.

Some private equity players, perhaps recognizing a softer cable market, decided 2011 was the time to exit its cable investments: MCG Capital sold its share in Avenue Broadband, and the Carlyle Group sold its stake in Insight to Time Warner. Other potential cable sellers had difficultly attracting acceptable bids on properties they were looking to deal. Charter pulled its LA systems off the auction block in September after bids came in much lower than the $2.5b, or $4,500 per sub, it was hoping to attract.

The decline in observed deal multiples however can be partially explained by the type of properties that were dealt in 2011. Many of the systems that changed hands were either located in rural, sparsely populated regions or were in need of maintenance and thus more capital investment. Wave Broadband and Baja Broadband for example targeted outdated properties at “value” prices that were in need of repairs and upgrades, but which also offered the opportunity to expand ARPU. In its purchase of cable systems from Broadstripe, Wave paid just $533 per sub, the lowest per customer multiple observed this year.

The presence of opportunistic buyers such as Wave and Baja implies that even in a down cable market, the cable M&A scene promises to remain active. But with companies looking to make more strategic, “tuck-in” and “edge-out” acquisitions around their current footprints, we are more likely to see a steady dose of small to mid-sized cable purchases in 2012 and less Insight-sized deals.


Knology Makes "Tuck In" Acquisition

Spending $30m to Expand Around Dothan and Augusta

In conjunction with its year-end 2010 earnings release, cable operator Knology (Nasdaq:KNOL) announced today that it will acquire cable systems in Fort Gordon, Georgia and Troy, Alabama, for $30m in cash.  The systems, which serve 21,000 connections, are being sold by CoBridge Broadband, which acquired them last October from Charter Communications as part of a 36 system deal.  Financial details of that transaction were not released, but the connections being sold off to Knology account for nearly one-third of the 64,900 total connections sold by Charter to CoBridge.

Knology, which said at a recent investor conference that it was actively seeking accretive acquisitions, said the purchase will result in a slightly reduced debt-to-cash flow ratio.  It plans to fund the buy with $10m from cash on hand and $20m from the proceeds of a recent debt repricing transaction.

The Fort Gordon property is adjacent to Knology’s Augusta market and Troy is near its Dothan, Alabama system.  Ceo Rodger Johnson indicated that Knology will consolidate the head-ends into its existing infrastructure.

Knology appears to be getting a pretty good deal for the markets, at least relative to several cable transactions announced in 2010, including Knology’s own $164m Sunflower Broadband acquisition.  Where Knology ponied up more than 3x revenue and 6.1x pro forma cash flow in that deal, which closed last October, the CoBridge buy comes in at just 2x revenue and 5.5x OIBDA.  Knology reported the systems have run-rate revenue and OIBDA of $15m and $5.5m, respectively.  On a per connection basis, the multiple comes in at $1,429, versus more than $2,500 per connection in the Sunflower Broadband buy last year.

Granted, the former Charter properties probably need some TLC, which may be a factor in the lower price, but as we noted recently, cable values got pretty heady in 2010, and given the hyper-competitive video space we have to wonder if a slight pull-back may be in the works.

On the other hand, CoBridge, which is backed by The Gores Group, said last fall to expect to see it make more acquisitions—though its strategy of acquiring turnaround properties isn’t likely to push average deal values for cable assets higher.  We’re hoping to find the deal price for the Charter/CoBridge deal in Charter’s year-end financial statements, which haven’t yet been released.  If we do, we’ll let you know just how much CoBridge was willing to spend to get into the cable game.


Knology Scoops Up Sunflower Broadband

Through its second quarter earnings press release on August 4, 2010, Knology (Nasdaq:KNOL) reported that it has signed a definitive agreement to acquire the assets of Sunflower Broadband from The World Company for $165m in cash.

Sunflower, based in Lawrence, Kan., provides video, voice and data services passing approximately 54k homes in Douglas County, Kan.  At the end of 2009, Sunflower served 29k basic video subscribers, 15k voice connections and 28k broadband customers.  Sunflower was started back in 1970 by The World Company, a multi-media company also based in Lawrence, Kan.

According to the press release, Sunflower is expected to generate $51m in revenues and $22m in OIBDA during 2010. The deal is expected to generate $5m in synergies.

Overbuilder KNOL, based in West Point, Ga., served 232k basic video subscribers, 212k broadband customers and 256k voice connections as of 2Q10.  Its operations pass roughly 962k homes in Alabama, Florida, Georgia, South Carolina, South Dakota, and Tennessee.

The deal is expected to close in the fourth quarter of 2010 and is structured as an asset deal, providing KNOL the benefit of stepping-up the tax basis of the assets acquired.  KNOL expects to pay for the transaction with cash on hand and issue debt financing for the remaining amount.

JSICA Observations: The cable market remains hot. After being in the mix on some other recent deals, most notably the Bresnan Communications deal, KNOL finally lands one.  In Sunflower, KNOL picks up a well established cable company with a quality hybrid fiber/coax network offering a package of video, data and voice services similar to its own in a geographical area that begins to bridge its southeast operations with its upper midwest operations.

It’s a strategic move for KNOL since there is not much upside potential in purchasing the operations alone.  Sunflower enjoys strong penetration rates in its market.  Its basic video penetration of homes passed is roughly 53% while broadband penetration of basic video subs is very high at roughly 96%.  Sunflower’s estimated 2010 OIBDA margin comes in strong at 43%.  Besides the $5m in synergies, most likely from centralizing some operations, there isn’t much room to improve operating margins, and due to Sunflower’s high penetration rates, KNOL will have a tough time adding to the top line.  Increasing premium services sold is KNOL’s best chance at expanding the top line.  However, the deal does put KNOL in a good position to grow the Kansas business through expansion.  A point KNOL made clear in its press release, “Geography offers attractive edge-out possibilities, tack-on acquisition and larger acquisition opportunities…” 

KNOL was no doubt referring to the immediate geographical area around Lawrence, Kan. as well as the larger geographical area between the upper edge of its southeast operations in Tennessee and its upper midwest operations in South Dakota.  Lawrence, Kan. sits 41 miles west of Kansas City, Kan. and 25 miles east of Topeka, Kan. and is considered a “growth” area for the outward expansion of the two cities– an area well suited for KNOL’s edge-out expansion style, which the company has employed in its other markets.  On a larger scale, if KNOL can grow through additional acquisitions in this central region of the country, it can capitalize on economies of scale by running operations from South Dakota down to Florida.       When rumors of the deal first started floating around last month, analysts had it pegged at 8.0x to 8.5x OIBDA.  But, in the end, after backing out the value of Sunflower’s 700 MHz wireless license (at auction price), KNOL is paying 7.4x OIBDA, 3.2x revenue and $2,268 per connection.  The revenue and OIBDA multiples come in slightly below the last two major cable deals—Cablevision System Corporation’s (NYSE:CVC) pending acquisition of Bresnan Communications and Shenandoah Telecommunications’ pending acquisition of Jet Broadband while the price per connection is slightly above.  Although analysts are currently bullish on cable deal multiples, the slight pullback in the revenue and OIBDA multiples of this deal is most likely due to KNOL not expecting much in the way of organic growth from the operations.  The price per home passed came in at $3,028 and price per basic video subscriber came in at $5,638—both higher than any other cable deal this year, thanks no doubt to Sunflower’s high penetration rates.


Knology Closes Sunflower Broadband Acquisition

Knology Closes $165m Deal

On October 15, 2010, Knology, Inc. (Nasdaq:KNOL) announced it has closed its acquisition of Sunflower Broadband (Sunflower), announced on August 4, 2010 for $165m in cash. 

Lawrence, Kan.-based Sunflower provides video, voice and data services, passing approximately 54k homes in the Lawrence, Eudora and Douglas County area.  At the end of 2009, Sunflower served 29k basic video subscribers, 15k voice connections and 28k broadband customers. Sunflower is expected to generate $51m in revenues and $22m in EBITDA—before $5m in expected synergies—in 2010. 

West Point, Ga.-based KNOL provides interactive communications and entertainment services in the Southeast and upper Midwest regions of the U.S.  As of 2Q10, the company passed approximately 962k marketable homes and served 232k basic video subs, 253k voice connections and 213k data customers.  “Sunflower has achieved excellent customer penetration and attractive EBITDA and free cash flow results, and this acquisition complements our continued focus on organic growth, including the high ROI edge-out investments,” said KNOL president and cfo M. Todd Holt. “We were able to successfully access the credit markets to fund the transaction and refinance our debt in a manner that allows us significant flexibility to continue to grow our business and extend our maturities.” 

In connection with the deal, KNOL has entered into a $770m first lien credit facility with proceeds used to partially fund the acquisition purchase price, refinance the company’s existing credit facility, and pay related transaction costs.  Additionally, KNOL used approximately $48m in cash to partially fund the transaction.  “This is an exciting transaction for our company,” said KNOL chairman and ceo Rodger L. Johnson. “Sunflower is a very successful, customer-focused business that will expand Knology’s footprint and add meaningful scale to our existing operations.” 

JSICA Observations: When the deal was first announced, we pegged the multiples at 3.2x revenue and 7.4x OIBDA—slightly below the 3.4x revenue and 7.8x OIBDA Cablevision System Corporation (NYSE:CVC) is paying for Bresnan Communications, and below the 3.4x revenue and 10.7x OIBDA Shenandoah Telecommunications (Nasdaq:SHEN) is paying for JetBroadband—although the $2,268 per connection KNOL is paying is above the per connection multiples of the CVC and SHEN deals.  At the time we noted Sunflower has strong penetration rates in its market, and KNOL isn’t likely to see much upside potential from this acquisition alone. 

But, this edge-out strategy puts KNOL in a good position to further expand in the Kansas market, and future growth will likely be aimed at bridging the gap between KNOL’s upper Midwest and Southeast U.S. service areas.  Long-term, if KNOL can grow through organic growth and additional acquisitions to reach from Minnesota and South Dakota in the north to Florida in the south, the company will benefit from economies of scale. In the short term, increasing sales of premium services is KNOL’s best bet for top-line growth.


CoBridge Closes on Charter Systems

Deal involves 36 Systems in Seven States

On October 22, 2010, CoBridge Communications, LLC, announced it closed on the purchase of 36 cable systems in seven states serving approximately 65,000 subscribers from Charter Communications, Inc. (Nasdaq:CHTR, “Charter”).  Financial terms of the transaction were not disclosed. 

The systems are located in the states of Alabama, Georgia, Louisiana, Missouri, Ohio and Texas and include areas such as Ozark and Troy, Ala., Benton and Little Rock, Ark., and Corpus Christi, Texas. 

CoBridge is a recently formed communications company and an affiliate of The Gores Group, a Los Angeles-based private equity firm. 

CoBridge’s ceo, Scott Widham, said the company plans to upgrade the triple-play service offerings of the 36 Charter systems and also add business-class VoIP and Ethernet-based services.  This will be accomplished by converting remaining one-way systems to two-way systems and increasing bandwidth through the use of digital terminal adapters for analog-to-digital conversions, according to Widham. 

Charter is the fourth-largest cable operator in the U.S. ranked by basic video subscribers.  Charter filed for chapter 11 bankruptcy in March of 2009 and emerged from bankruptcy in November 2009.  Its common stock began trading on Nasdaq on Sept. 14, 2010.  

JSICA Observations:  There isn’t much information available regarding CoBridge, but, its management team comes with notable telecommunications industry experience.  CoBridge’s ceo, Scott Widham, was the former co-ceo of Broadwing Communications, which was purchased by Level 3 Communications in 2007.  Before that, Widham founded Capital Cable which was acquired by Charter.  CoBridge’s cfo, Bruce Herman, was ceo and cfo at PrairieWave Communications and led M&A activities at Knology (Nasdaq:KNOL) for two years. 

According to its website, CoBridge was recently formed to provide voice, video and broadband services with the stated goal “to purchase under-managed and under-marketed cable television communities that can be improved over time.” 

CoBridge found a good target in Charter.  Charter has been burdened by large debt balances for years, sapping its cash resources necessary for capital improvements.  Although Charter reduced its debt by $8b through bankruptcy restructuring, it still has $13b in debt of which $6.5b comes due over the next four years.  Since its current operating cash flows—roughly $2.5b annually—won’t be sufficient to service its debt and make all necessary capital improvements to effectively compete, it’s no surprise that Charter continues to unload some of its properties.