Knology: Data Bucks Rising at Verizon

11/23/2003 7:00 PM Eastern

Overbuilding MSO Knology Inc. still hasn't set a date for its planned $86.3 million initial public offering, but it has disclosed more about its pending purchase of cable systems in Florida and California.

Knology agreed to buy Verizon Media Ventures' cable systems in Pinellas County, Fla., and Cerritos, Calif., in July. The deal is expected to close by year-end.

According to a new proxy statement filed with the Securities and Exchange Commission, Knology will pay about $9.4 million in cash and assume about $8 million in debt.

Also, according to the proxy, Knology will issue warrants for about 1 million shares of stock to "a prior prospective purchaser" of the Verizon systems for release of its exclusivity rights, worth an estimated $7.5 million.

Throw in about $500,000 in transaction costs, and Knology said in the proxy that the deal is worth about $25.4 million.

Knology would not identify the prior perspective purchaser, but sources said it's GLA New Ventures LLC, a St. Louis-based management group headed by cable veteran Jim Moffit. Moffit served stints with Brooks Fiber Properties Inc. and Cencom Cable Associates, among others.

In its July press release announcing the Verizon deal, Knology referenced GLA as one of its backers in the transaction.

The Verizon Media systems — which were marketed under the Americast brand name — have about 57,000 subscribers, mainly in Pinellas County. Knology has about 133,000 subscribers in several states.

Knology has said in the past that $15 million of the IPO proceeds would go to pay Verizon Media, and about $53 million would be spent on system upgrades, mainly to introduce telephony.

Knology offers a mixture of circuit-switched and voice-over-Internet protocol service in most of its markets. According to sources, most of the Verizon Media systems had already been rebuilt to 750-Megahertz capacity.

Verizon had been trying to sell the cable systems — which it inherited from GTE Corp. — since about 2000. An earlier deal to sell the operations to Adelphia Communications Corp. fell through in early 2002.

Per the proxy, Verizon had shifted focus from its video product to its high-speed data offering, which is delivered via cable modem rather than telco digital subscriber line service.

According to the SEC document, video revenue has been falling steadily at the Verizon systems since 2001 while cable modem revenue has nearly tripled.

Video revenue at the Pinellas County and Cerritos systems was $31.95 million in 2001, falling to $30.2 million in 1992.

In the first nine months of 2003, overall revenue continued to decline to $24.9 million (down from $26.4 million in the same period of 2002).

But data revenue rose 193.7% between 2000 and 2002, from $1.65 million to $4.85 million.

Knology has been steadily increasing revenue in video, voice and data.

Video revenue at the West Point, Ga.-based operator rose 45.3% between 2000 and 2002 ($41.82 million to $60.75 million); voice revenue rose 68.1% ($34.94 million to $58.74 million) and data revenue increased 285.7% ($5.8 million to $22.37 million).

The Pinellas County systems are an overbuild of Bright House Networks, the MSO controlled by Advance/Newhouse. Advance/Newhouse gained control of those systems – along with others in Florida, Alabama, Indiana, California and Michigan with 2.1 million customers — from Time Warner Cable in 2002.

In Cerritos, Americast was the incumbent.

A Glance at Knology
Knology Verizon Media Combined
For nine months ended Sept. 30. Dollars, in thousands, except for subscribers.
Source: Knology Inc. proxy.
Operating Revenue127,28924,899152,188
Operating Income (Loss)(37,580)(41,602)(76,085)

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