Finance

Sizing Up Would-Be Consolidator Altice

Suddenlink Buyer Has Aspirations, Options — and Issues 6/08/2015 8:00 AM Eastern
TakeAway

Small and midsized cable operators, anxious for a new consolidator to come on the scene in the wake of the Charter Communications-Time Warner Cable merger, are hopeful that European telecom giant Altice could fit that role. But can the deep-pocketed company live up to those expectations?

Small and midsized cable operators, anxious for a new consolidator to come on the scene in the wake of the Charter Communications-Time Warner Cable merger, are hopeful that European telecom giant Altice could fit that role.

 

But can the deep-pocketed company — its market capitalization is about $32 billion — live up to those expectations?

 

Altice seemingly came out of nowhere last month with a $9.1 billion deal to buy St. Louis-based Suddenlink Communications, the 1.5 million subscriber MSO founded by longtime cable executive Jerry Kent.

 

Altice appears to have all the characteristics of a savvy cable consolidator: a strong deal currency in its publicly traded stock, access to billions of dollars of cheap debt and a stated desire to grow U.S. operations substantially through acquisition.

 

But some cable executives wonder how Altice will be able to squeeze a projected $215 million in annual cost synergies from Suddenlink, which has traditionally been a tightly-run ship. And, given that Altice’s shares trade on the Euronext Amsterdam Exchange, will its stock be an attractive lure for smaller, family-run businesses that traditionally prefer stock to cash for tax purposes?

 

LET’S GET SMALL

 

There’s no question the broader cable industry could use some consolidation. The National Cable & Telecommunications Association counts 5,208 cable systems across the country and 660 companies calling themselves cable operators. A well-funded consolidator could be just what the market has been seeking.

 

Altice seems serious about its U.S. ambitions. CEO Dexter Goei said Suddenlink would be the first of many acquisitions here. Chairman Patrick Drahi — who has modeled his career after Liberty Media chairman John Malone’s — told French parliamentary hearing he “wasn’t ready” for a Time Warner Cable deal because he didn’t have the management resources to compete with his role model.

 

Malone himself, at a recent Liberty shareholders meeting, praised Drahi’s model for using cheap available debt and “an equity that is currently screaming.”

 

Altice shares have more than doubled in the past 12 months, closing at $129.02 on June 3.

 

In the past two years, Altice has been an extremely aggressive acquirer. It bought French cable company Numericable in 2014, French cellular carrier SFR that same year and, this month, closed on its purchase of Portugal Telecom, spending about $30 billion overall.

 

And despite some criticism in the French press over “slash-and-burn” management techniques, Altice has been a productive investment: Its stock trades at about 11 times cash flow while other cellular carriers trade at about seven times, according to Malone.

 

Stories of Altice pressing some vendors for deep discounts, refusing to pay others, and even failing to buy copier paper and toilet paper for employees at its SFR facilities in France have littered the French press over the past several months. Would Altice use the same tactics to achieve the savings it needs to make its U.S. investment pay off?

 

“Can he [Drahi] make Suddenlink work on a synergy basis?” Malone asked rhetorically at the recent shareholders’ meeting. “No, he has no synergies. Can he make a spread between his cost of funding and the cash flow that that business can generate? Yes. Can he cut 2,000 people out of a 5,000-person workforce? I doubt it. Maybe in France, but Jerry Kent is not that sloppy an operator.”

 

Malone added: “It’s great to have a new pair of eyes looking at the business and creating a whole new way of thinking of things.”

 

That new approach could include broadband discounts and steep cost cuts, in the view of former Time Warner Cable chief operating officer Landel Hobbs, now president of his own consulting company, LCH Enterprises.

 

“I think they may take a hard look at HSD pricing — i.e., lower prices — as a way to increase penetration, which may be possible if the operating cost model has been changed,” Hobbs said.

 

LET’S GET SCALE

 

While other players are expected to get involved in consolidating the industry, the list of possible participants is getting shorter, especially as Comcast and Charter are expected to find it more difficult to add scale due to the regulatory process.

 

“Possible strategics or sponsors have to seriously think about how to achieve scale or their exit strategy going forward,” Hobbs said.

 

One possible participant could be Verizon Communications, which stopped building out new FiOS TV markets in 2010 and has recently focused on mobile video while selling some wireline assets. Hobbs said Verizon could change course and become a buyer, or could stay on its current path and be a bigger seller of its wireline or FiOS footprint.

 

If Verizon decides to sell, Altice could be a buyer. Citigroup analyst Michael Rollins said Altice could buy the rest of the FiOS assets for about $34 billion. That would give Altice immediate scale: FiOS TV had 5.7 million video customers and 6.7 million FiOS Internet customers as of March 30.

 

 

Altice at A Glance

 

Based: Luxembourg

Chairman: Patrick Drahi

CEO: Dexter Goei

Stock Exchange: Euronext Amsterdam

Stock Symbol: ATC

Stock Price: 114.50€ ($129.05)

Market Cap: $32.01 billion

2014 Revenue: 13.5 billion€ ($15.21 billon)

Brands: Numericable; Orange; SFR; MCS TV; Tricom; PT; Green.ch

SOURCE: Company reports

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