Sunflower Broadband fills several niches for Knology

Knology (Nasdaq: KNOL) checked off a series of boxes before spending $165 million to acquire Kansas-based Sunflower Broadband.

Did the company fit with the competitive service provider's overall plan to offer triple play services? Check.

Was there room to expand within the Sunflower Broadband footprint? Check.

Todd Holt, KnologyWas the Sunflower Broadband footprint within Knology's desired Mississippi watershed demographic? Check.

"We were able to check every box," said Todd Holt, president-CFO of Knology, speaking at the Morgan Keegan 2010 Technology Conference in New York City. "We want to buy access only in secondary and tertiary markets. We like to stay out of Verizon FiOS territory. We like to buy well run businesses, good ARPUs, good bundle stats, good focus on customer service. We don't want to make a big bet or learn a new technology; we're looking for hybrid fiber/coax networks that we understand."

Check, check and final check is in the mail.

In fact, Holt said, Sunflower even fit the newest box Knology has constructed as part of its successful business plan. It "has a great foundation with the footprint we acquired but it also has a nice ancillary edge-out, fill-in, tack-on acquisition opportunities," he said.

Morgan Keegan Technology ConferenceAggressively pursuing organic growth is how Knology, as a competitive provider, has remained successful even in dark economic times. While other cable companies lose subscribers, Knology builds business by edging out its footprint and adding in new users with a 40 percent return on investment, he said.

"A lot of companies are going backward today but we are growing our business organically. Broadband is an awesome space to be in today," he said.

While organic growth is the key for adding to Knology's base of 698,000 residential and 107,000 business connections, the company is willing to take a plunge into the M&A space if, as with Sunflower, all the boxes can be checked, he said.

"We like to stick to Middle America. We have 10 markets that are fairly clustered in the Southeast and then two markets in the upper Midwest, the South Dakota, Minnesota and Iowa region. This Kansas geography fills that gap. It adds diversity to our footprint from the Southeast and upper Midwest and stretches us out some," he said.

Knology was reportedly in the running for the Bresnan Communications properties that were auctioned off this spring. Like Sunflower, the Bresnan systems were clustered in secondary and tertiary markets in Montana. Unlike Bresnan, it took more than $1 billion to buy those properties, a price tag Cablevision Systems could afford but Knology could not.

For Knology, the game is to check the boxes and spend the money wisely but not freely.

"We have a lot of cash on the balance sheet earning 1 percent or so so it's going to be nice to put some of that cash to work on a long-term growth asset," Holt said. "We've lived in the die of very, very high leverage and we're not going back there. We want to keep that leverage at a manageable level, maintain good liquidity on the balance sheet and growth organically."

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