Drahi: Goal to Bring European Cost Discipline to U.S.

Altice Chairman Offers Glimpse Into U.S. Op Strategy

New York – Altice chairman Patrick Drahi told a packed house at the Goldman Sachs Communicopia conference here Thursday that he plans to take a European approach to the U.S. cable business by keeping a keen eye on costs and boosting margins.

“My model is to bring U.S. ARPU to Europe and the European expense to the U.S.,” Drahi said at the conference. At about $158.52 per customer per month, Cablevision has one of the highest ARPUs [average monthly revenue per unit] in the cable business.

Altice agreed on Thursday to purchase Cablevision in a cash and assumed debt deal valued at $17.7 billion. The deal, which represents about a 9-times cash flow multiple before costs synergies and about 6 times after an estimated $900 million in cost synergies. Those cost synergies have been controversial – they are about $100 million more than the $800 million Charter expects from its purchase of Time Warner Cable, a company about five times larger than Cablevision.  At about 14% of revenue, some analysts have said the cost synergies are aggressive at best, impossible at most.

The deal comes about four months after Altice announced its first entry into the U.S. cable business, its pending $9.1 billion purchase of Suddenlink Communications.  That deal is expected to close by the end of the year.

In a blog posting, MoffettNathanson principal and senior analyst Craig Moffett said Altice will be hard pressed to squeeze the equivalent of 30% of costs out of Cablevision’s business.

“That kind of cost-cutting is a tall order in any market, but will be especially so in New York, where Altice will be going up against Verizon FiOS,” Moffett wrote. “Cost reductions like those won’t just mean cutting SG&A.  It will mean slashing customer service; repair and maintenance, and sales and marketing (specifically, channel mix optimization, and back-office upgrades).  It’s hard not to imagine that that might have at least some impact on market share.”

At the Communacopia conference, Drahi said that he sees opportunity to cut operating costs by improving the network – pushing fiber into the home and eliminating amplifiers and other electronic equipment. Drahi continually compared Cablevision’s network to Altice’s French Numericable unit, adding that despite Cablevision’s size and market density, its costs are higher.

“Cablevision has five million homes passed in a very dense area around New York which is half what Numericable has in France,” Drahi said. “So the cost of running this network should be around half the cost of running a network in France. It is three time [larger]. That is a problem.”

Employee salaries are also ripe for change, he said. At the conference, Altice CEO Dexter Goei said more than 300 Cablevision employees make $300,000 or more a year.

“We understand why,” Goei said. “There’s a new sheriff in town. We will probably run things a little differently.”

Drahi was even more blunt, adding that no one at Altice makes more than a “couple of hundred thousand a year.”

“I don’t like to pay salaries. I pay as little as I can,” Drahi said. “… [Cablevision has] many layers of people that are highly paid. This will change.”

Drahi believes the cost cutting will help improve margins – Cablevision’s are at about 32% while Suddenlink’s are 39%. He said Cablevision, which is larger, more penetrated and more tightly clustered, should have a higher profit margin.

“Just by doing best in class we increase our margins,” Drahi said.