Knology Extends Networks
Overbuilder Reinvests Cash to ‘Edge Out' Markets
Knology, the West Point, Ga.-based cable-TV overbuilder, said it will spend $15 million to extend its reach in markets where it already operates, a move that it estimates could add as many as 7,000 new connections this year.
Knology said the "edge out" is an expansion of its effort to extend its network to neighborhoods it may have missed in its initial buildout. That fill-in project, which cost about $8 million last year, had some impressive returns.
On a conference call to discuss its fourth-quarter results Feb. 23, Knology CEO Rodger Johnson said the fill-in project involved about 30 neighborhoods with revenue-generating-unit penetrations averaging about 69% in those areas -- four were at more than 100%; 14 were 75% or greater, 10 were above 50% and two were below 50%. Johnson said the results encouraged Knology to expand the program this year.
While Knology is not revealing which markets it will edge out -- although Johnson said a recently gained franchise in Auburn, Ala., is a candidate -- it expected the returns to be even greater. President and chief financial officer Todd Holt said on the conference call that Knology plans to begin the edge-out project in the middle to late part of the second quarter. Holt said the project should yield about 7,000 connections in the first year, pass 22,000 homes and yield $11 million in recurring revenue and $7 million in recurring cash flow.
Knology will basically fund the projects through its own free cash flow, of which the company generated about $49.7 million in 2009. Knology's debt covenants prohibit it from providing a dividend or buying back its own stock -- the company did manage to negotiate a $10 million carve out in its last debt deal for dividends and buybacks, but only if its leverage ratio falls to about 3 times cash flow. That isn't expected to happen until at least 2012.
Knology's edge-out program will have higher returns than a stock buyback program, which Miller Tabak media analyst David Joyce estimated would generate a return of about 9.7%.
"This is kind of a change but a positive one in how people should be looking at cable companies, because there is a much greater return by reinvesting in the company," Joyce said.
Knology operates in 12 secondary and tertiary markets in Florida, South Dakota, Georgia, South Carolina, Alabama and Tennessee. In the fourth quarter, revenue rose 3.4% to $107.1 million and cash flow was up 3.7% to $36.7 million. Knology also added 11,951 new connections in the period (including about 8,000 connections from a recent acquisition), ending the quarter with 588,145 residential connections, which included video, voice and data customers.
Joyce believes that there is still upside to the edge-out program, even after this year. He estimated that Knology has franchise rights in areas with about 1.3 million passings, but currently only passes about 930,000 homes.
"They could increase their actual passings another 40%," Joyce said.
