After much media speculation, Knology Inc. confirmed today it will acquire incumbent cable operator Sunflower Broadband for $165 million in cash, in a deal expected to close during the fourth quarter.
The addition of Sunflower, which operates in Douglas County and Lawrence, Kansas, expands Knology’s reach to 54,000 homes passed; and it bridges the gap between the company’s existing footprint in the Southeast and the upper Midwest.
Sunflower is expected to generate $51 million in revenues and $22 million in EBITDA in 2010, before an expected $5 million in cost and tax synergies are taken into account.
Cost synergies most likely will come, in part, from a reduction in redundant services and technicians that can extend from existing operations. "The footprint (Knology is) acquiring is not an island to its own," said Barry McCarver, senior vice president/Equity Research, Telecommunications at Stephens Inc., a financial-services firm based in Little Rock, Ark. "In my experience, Knology knows the companies they acquire for a pretty good period of time before an acquisition.”
According to McCarver, carriers under consideration historically share the same culture and value systems as Knology, and they operate in locations with similar competitive landscapes and demand for services.
What Knology generally offers is a higher level of service, be it expanded video on demand or more advanced digital recording services.
"While I’m not intimately involved with Sunflower, I would guess that Knology can bring to the table some things that Sunflower doesn’t have or would have to spend capital to match. That is part of the attractiveness of the acquisition,” he added. “It’s not just going out and saying here is the revenue and income Sunflower has. It is what can we add to the platform to make more revenue and profit.”
Knology has indicated this won’t be the last stop for its acquisition train and McCarver agrees, noting expanding its territory with Sunflower places Knology closer to "several more great opportunities."
"The ability to do additional acquisitions of this nature can increase exponentially because it closes their footprint," McCarver said.
Knology made the acquisition announcement in conjunction with its second-quarter earnings report. The company’s revenue increased to $113 million, a jump of 4.7 percent compared with the same period a year ago. Adjusted EBITDA also went up, reaching $39.4 million, a 6.7-percent gain compared with the second quarter of 2009.
"The core business is continuing to perform well in this challenging economic environment, and we continue to experience success with our fill-in investments and wireless backhaul opportunities," Rodger Johnson, Knology’s chairman and CEO, said in a statement.
"We are fortunate to be in a position to add the Sunflower asset to the Knology operations without putting pressure on our balance sheet," added M. Todd Holt, Knology’s president and CFO.
McCarver said he considers the Sunflower acquisition to be a great deal that in all "likelihood will be significantly accretive."
-Monta Monaco Hernon