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Sale falls through for Knology

Less than six months after buying a California cable TV franchise from Verizon Communications, Knology Inc. said last May that it had signed an agreement to sell its new acquisition for more than double the purchase price.

The windfall was welcome news for Knology, the financially struggling West Point, Ga., cable company that had also just purchased Verizon Americast's cable operations in Pinellas County.

But last Friday, Knology revealed that the California sale had fallen through. The company said it is confident it will find another buyer. And the delay in selling the California franchise, which Knology has no interest in retaining, isn't likely to have an immediate impact on the company's Pinellas operations.

Still, the lost sale represents an untimely disappointment for the company, which is still in the process of righting its shaky financial ship.

"The termination of the purchase agreement is a setback for Knology," Robert W. Baird & Co. analyst William Power said Monday in a research note, adding that he believes the company has enough capital to meet its business plan through at least this year.

While acknowledging that the company expects to find a new buyer, Power said, "At this point, it is difficult to know whether the company will be able to sell it for close to the previous . . . purchase price."

Baird was one of the underwriters of Knology's initial public offering in December 2003.

Knology purchased the Cerritos, Calif., and Pinellas County cable systems from Verizon in December 2003 as part of the same transaction. The price tag included $10.3-million for the Pinellas County system and $6.6-million for the Cerritos piece, plus related closing costs. Verizon itself had struggled to unload the two cable properties.

Knology's desire to reach a deal with Verizon was mostly due to its interest in the Pinellas operations, which fit well with the company's home base in the Southeast. Within two months of completing the acquisition, Knology decided to shed the Cerritos franchise and soon concluded a sale agreement with Orange Broadband of Charlotte, N.C., which agreed to buy the California system for $14.8-million.

That represented an eye-popping return of more than 120 percent on an investment that Knology hadn't yet held for half a year. But Knology's deal with Orange Broadband fell apart after the latter failed to finalize a franchise agreement with the city of Cerritos.

Knology had planned to use the proceeds from the sale to fund capital expenditures and operating expenses in other markets, including Pinellas County. Felix Boccucci Jr., Knology's vice president for business development, said he doesn't expect the scuttled sale to affect the company's investments in its Pinellas system, which mostly involves the rollout of phone service.

That's not surprising given the importance of the Pinellas market to Knology's growth plans. Morgan Keegan & Co. analyst Tavis McCourt said that if the company has to scale back spending, it is more likely to do so in mature markets where it already offers cable TV, broadband and phone services throughout its service territory. Morgan Keegan was also an underwriter of Knology's IPO.

The canceled deal with Orange is the latest in a series of setbacks for the company.

Knology, which completed a debt restructuring in 2002, had expected to price its 2003 IPO at $12 to $14 a share, but ultimately had to settle for $9. After climbing to a peak of $10.86 in early 2004, Knology's stock has tumbled to less than a third of that price, due in large part to a string of disappointing quarterly financial reports.

Analysts expect Knology to report a net loss in the three months ended Dec. 31, as it did in each preceding quarter of 2004.

McCourt said Knology has recently faced a greater-than-expected challenge in Pinellas, where the impact of hurricanes and heavy promotional spending to launch its phone service caused the company to miss targets for revenue and earnings before interest, taxes, depreciation and amortization.

McCourt said the company's failure to complete its deal with Orange shouldn't prove to be a major problem so long as it can sell the Cerritos franchise to another party.

Knology's stock closed Monday at $3.32 a share, up 4 cents.

Louis Hau can be reached at (813) 226-3404 or