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
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
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
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
"They could increase their actual passings another 40%,"