Altice; market cap (as of 02/10/2015): € 18.8bn
Cablevision; market cap (as of 02/10/2015): $ 9.1bn

 

Introduction

It has been a record year for M&A in the US cable market with several multibillion deals. Indeed, Comcast’s failed attempt to acquire Time Warner Cable was soon followed by Charter’s $55bn offer for TWC. Now the new comer, Altice, has made its move announcing its largest acquisition so far.

On September 17, the multinational cable company Altice has agreed to buy Cablevision in a transaction valued $17.7bn including debt. The deal is part of Altice’s plan to broaden its business in the US. The company first entered the US market in May with the 70% acquisition of Suddenlink from the Private Equity firm BC Partners and CPP Investment Board.  Cablevision would vault Altice into the ranks of major pay-tv players in the U.S. and accelerate the creation of a cross-Atlantic cable giant. The combined entity would be the fourth largest cable operator in the United States.

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About Cablevision

Cablevision Systems Corporations is a US based telecommunications and media company that operates in the New York metropolitan area. It was founded in the 60’s by Charles Dolan and has, since then, been controlled by the Dolan family.

The company focuses mainly in three segments:

  • Cable, which includes video, high-speed data and VoIP;
  • Lightpath, which includes Ethernet-based data, Internet and voice;
  • Others, a segment that consists of the company’s media business (Newsday newspaper, News 12 Networks, and Cablevision Media Sales).

 

Cablevision serves more than 3.1m residential and business customers, and with c. 65% of its cable customers subscribing to triple-play services (video, high-speed Internet, and voice), it generates industry-leading ARPU ($159 in 2Q15). At the moment it is the 5th largest cable provider in the US. In 2014 it generated $6.46bn in revenues (+ 3.73% yoy)

 

About Altice

Altice is a French multinational cable, fibre, telecommunications, contents and media company founded by the Franco-Israeli billionaire and current CEO Patrick Drahi. It provides pay television, broadband Internet, fixed line telephony, and mobile telephony services to both residential and corporate customers.

The French giant is present and operates mainly in three regions: Western Europe, Israel and Overseas Territories (French Caribbean and the Indian Ocean regions and the Dominican Republic). With its announced acquisition of a 70% stake in Suddenlink in May, it stepped into the US market.

Altice has been on an acquisition binge over the past two years, acquiring telecom assets across Europe and beyond, and fuelling these transactions through aggressive leverage. Over the years, Altice has transformed itself from a “relative obscure cable company” into a major player in the sector. The company now boasts a portfolio that includes Numericable-SFR, a major cable and mobile French operator, Portugal Telecom, Portugal’s largest telecoms provider, and Suddenlink, a leading cable operator in US.

In order to value-enhance the growth of the company and support its deal making activity, Drahi, on June 26, opted for a change of corporate structure via a cross-border merger with Altice N.V., a newly formed Dutch entity. The merger allows Drahi to finance more transactions raising equity without diluting his voting rights, since the newly formed company has a dual-class share structure (shares A and B). Shareholders received three A shares, carrying one voting each, and one share B, carrying 25 voting rights, for each old share. Both shares A and B have the same economic rights and are traded on Euronext Amsterdam. As a result of the merger, the company now benefits from a more powerful equity acquisition currency that strengthens its position as a serial-buyer.

 

Deal Structure

Under the terms of the deal, Altice has offered $34.90 in cash for each share in Cablevision which represents 22% premium over the target’s closing price of $28.54 on September 16. Altice is paying $6.712 per video subscriber, taking into account the debt assumed. The value is comparable with $8.040 Altice paid for each Suddenlink subscriber and $7.138 Charter is paying for each Time Warner Cable user.

Altice’s offer values Cablevision at 9.64x 2015E EBITDA, in line with the 9.35x U.S. peers are valued at on average, according to Bloomberg Intelligence. The deal will be financed with $14.5bn of debt at Cablevision, of which $8.6bn new, and $3.3bn of cash from Altice, which it will raise by selling new Class A shares. BC Partners and CPP Investment Board have an option to participate for up to 30% of the equity of Cablevision.

The deal is expected to close in 2016, pending approval from the FCC and United States federal regulators.

 

Deal Rationale

By joining Cablevision’s 2.6m video customers with Suddenlink’s 1.1m, Altice is creating the fourth-largest cable video provider in the U.S. behind Cox with 3.9m.

Altice plans to save $1.05bn in annual costs over the next three to five years in part through bulk purchases of set-top boxes and modems, by eliminating overlapping corporate functions, and improving and simplifying its network. However, it remains uncertain whether this cost saving (cutting) can be achieved without jeopardizing Cablevision’s market share.

Additionally, the target’s cable segment serves 3.1 million customers and offers Triple Play services (its full-services package consisting of video, high-speed Internet, and voice) to 65% of its clients. It means that 35% of 3.1 million customers, or about 1 million, are not opting for Triple Play services. Altice, thanks to its international expertise, can persuade these customers to change to Triple Play and increase average revenue per user (ARPU) in the process. Furthermore, Altice has stated that it hopes to replicate Europe’s “quadruple play” model, the bundling of high-speed Internet, television, landline, and mobile, in the US as well.

According to the press released on its website, Altice also views a significant opportunity for growth in Cablevision’s Lightpath business, which currently has a market share of only 8%.

Finally, focussing on the targets margin we see that Cablevision had an adjusted EBITDA margin in 2014 of 28%, as compared to its competitors’ (Comcast, Charter, TWC, Cable 1) median EBITDA margin of approx. 36%. This means that Altice has significant potential to improve efficiencies and boost Cablevision’s adjusted EBITDA margin.

While operating with independent capital structures, Cablevision and Suddenlink will draw upon management from both companies creating a leading communications services and technology group in the US market.

Market reaction

The stock price of Cablevision rose by about 13.9% on the day of the announcement of the deal moving from $28.54, the closing price on September 16 to $32.51. Looking at its monthly price change over the past month Cablevision’s stock price has risen by a steep 27%, hovering close to its 52-week high of $33.27.

Advisors

JP Morgan, BNP Paribas and Barclays acted as financial advisors to Altice. Bank of America Merrill Lynch, Guggenheim Securities and PJT Partners acted as financial advisors to Cablevision.

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