Knology Extends Networks


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

On a conference call to discuss its fourthquarter
results Feb. 23, Knology CEO Rodger
Johnson said the fill-in project involved about
30 neighborhoods with revenue-generatingunit
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 edgeout
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 fl ow.

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.