Altice SA; Market Cap (as of 06/03/2015): €24bn
Altice’s use of high levels of debt to fund its consolidation of the cable and telecoms sector in Europe has raised many eyebrows among investors and analysts, but so far the risks seem to be paying off. Since it’s initial public offering at the start of 2014, shares in Altice SA have increased by almost 220%, giving it a market capitalization of €24bn as of March 6, 2015. Will this be a sustainable model in the future?
European Telecom M&A drivers
Since 2009 we have observed an increasing consolidation in the European telecom sector. The reasons for this trend in different EU countries might differ. For example, in the UK we could observe an unusual segregation between fixed and mobile areas. The UK’s leader, British Telecom, still had no mobile presence until a few months ago. Eventually BT acquired EE to address this issue (refer to our coverage on BT’s acquisition of EE). As for Italy, Germany and France the very low percentage of broadband subscriptions (under 20%) and price wars might be the reason for coming structural changes in the telecoms in these countries. Mobile, one of the main revenue streams for telecoms, has suffered a sharp profit decrease in recent years due to fierce competition, with return on capital invested almost halving between 2010 and 2014.
Nevertheless there are favorable signals from the regulators. The EU set itself a goal to catch up with the US by investing in the “digital economy”. Therefore, we could observe the loosening of the antitrust policy and creation of bigger players in the European countries. This scenario fits Altice. The company aims to create multi-play offerings and consolidate the industry. With backwinds from regulators and loose monetary policy their strategy has good chances.
Let us take a closer look at the company, how it managed to accomplish its growth and what is the outlook for the future.
Company Structure
Altice SA is incorporated in Luxembourg and traded on the Amsterdam exchange. The principal owners of Altice are: Patrick Drahi who owns a controlling stake of 56.82%; followed by The Carlyle Group and Capital World Investors who have 6.72% and 5.02% respectively. Altice SA operates in broadband, pay TV and mobile segments and is divided into the subsidiaries as depicted in the graphic below.
Source: company website
The two main branches of Altice are “Altice International” which houses Israeli, European and Caribbean interests, and Numericable Group, from which Altice owns 60%.
In January Portugal Telecom was acquired by Altice for €7.4bn; having been spun off by mobile operator Oi. Meanwhile, Numericable Group acquired a controlling stake in French telecoms and cable operator SFR for €3.9bn from Vivendi, bringing the new entity of Numericable-SFR into the Altice family.
The Strategy
Altice’s impressive performance has been the result of aggressive deal making over the last several years. Since 2011, the company and its subsidiaries have made a total of 26 deals, leaving it with a net Long Term Debt to EBITDA ratio of 4.4x as of 2014 – considering all international debt and synergies realized from Portugal Telecom, SFR and Altice International. This amount of leverage is about twice as high as the industry average and Altice intends to keep it at this level.
Skeptics have claimed that this amount of leverage is too risky of a structure, especially with the possibility of rates increasing with renewed economic activity in Europe. However, Mr Okhuijsen, Altice’s CFO, claims: “In Europe, a lot of the boards are conservative, but we think [use of leverage] is clearly good. You can add debt to your structure to continue to grow.” This has been the justification behind running a net debt to EBITDA ratio over twice of the industry standard. Moreover the low rate environment is likely to continue while looking at analyst consensus forecasts we see the net LTD/EBITDA going down to 2.6x by 2016, that is with no other acquisitions. But the low rate environment for euro denominated debt is not the only supporting weapon Mr. Drahi relies on.
Besides the use of debt, Altice has also been using an aggressive model when it comes to running the acquired businesses. With the aid of a frugal team in Geneva, Drahi has slashed employee numbers, slimmed executive numbers and outsourced costs abroad. So far this has proved effective and has generated healthy revenues, whose reliability has allowed for more debt to be raised on beneficial terms.
Although investors have cheered this on, it has not gone over so well with labor unions. In the recent acquisition of a controlling stake in SFR, Altice was forced to agree to a 36-month freeze on firing employees. Nevertheless this did not impede the reshuffling of the executive committee, where 60 members were asked to leave.
Looking into the future
From the management’s statements they are on the lookout for new projects and they claim to be very fast in execution. Considering the low interest rate environment, successful cost cutting and a bet on the European telecom consolidation and industry trend towards multi-play, that Altice develops in its acquisitions; there are high chances of success.
Nevertheless, it is possible that Altice’s growth will be impeded by the same tight regulations that have hampered the industry’s lead players. Although inspired by the conquests of Liberty Global, the world’s largest international cable company, it is not sure that Drahi will be able to create that same empire that Mr. John Malone was able to form in the United States.
What lies ahead for Altice is anyone’s guess, but if Mr. Goei, Altice CEO’s words are anything to go by – there will be a continued wave of consolidation in the French telecoms sector, where a price war has slashed revenues. Bouygues Telecom has been named as a possible target.
Meanwhile, Mr Drahi hired another prominent Morgan Stanley TMT banker, Bernard Mourad, to help him build the Altice Media Group to follow on the footsteps of Mr. Malone that expanded into media later in his career.
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