WOW Sale Boosts Knology Shares


Miller, Tabak & Co. media analyst David Joyce initiated coverage of Knology Inc. last week with a “buy” rating and an $8 price target, citing controlled debt and growing valuations in the cable overbuilder sector as a plus for the stock.

Joyce wrote that Knology completed a balance-sheet restructuring in 2002 and went public in 2003, “so its debt service is manageable. With capex weighted toward variable purchases, the company should turn the corner and be free cash flow break-even for the year.”

On the downside, Joyce wrote that the nature of the overbuilder business pits Knology against incumbent cable operators and satellite service providers – and soon the regional Bell telephone companies, which are rolling out video to complement their voice and high-speed Internet offerings. Knology also faces threats from hurricanes due to the location of some of its systems, particularly near the Gulf Coast of Florida.

But the stock has been on a run in the past few months — Knology shares have risen 74.5% ($2.86 each) between Dec. 30 and April 6 — mainly because of the recent sale of another overbuilder, WideOpenWest (WOW).

Back in December, WOW announced a sale to private-equity firm Avista Capital Partners for about $800 million, implying a 2005 operating cash flow multiple of 9.5 times. At that price, Joyce wrote, Knology should be trading in the $7 range.