In 2017, billionaire Patrick Drahi made a bold move: to spin off the US arm of his telecommunications empire from its heavily indebted European parent company in one of the biggest IPOs of that year.
The listing was designed to free up Altice USA to embark on a series of ambitious acquisitions and a massive infrastructure building spree that would establish and grow the North American arm of its sprawling group.
But five years later, Altice USA’s stock price languishes at less than half its IPO price. Drahi, who owns 48% of the company, is sitting on more than $4 billion in paper losses following a valuation crash since December 2020, according to data from S&P Capital IQ.
The company is losing broadband subscribers, rivals have gotten ahead of its mobile business and the strategy to acquire its French-Israeli founder in the United States has fallen through. Fundamentally, investors are unconvinced that the company’s biggest bet – an expensive investment in fiber optic technology – will drive prices down over the long term and attract new customers.
“There really isn’t a short-term investment thesis,” says one investor. “The stock is trading at a steep discount to its peers.”
Drahi, whose debt-fueled business empire stretches from Portugal to Israel and includes US auction house Sotheby’s, recently rose to prominence in the UK when he took an 18% stake in the former state monopoly BT.
He has yet to outline his vision for the prized British asset, but investors are closely watching how his empire fares in the United States as a litmus test for his style of doing business in uncharted territories.
Inability to gain scale
As a young entrepreneur in France in the early 1990s, Drahi started a television cable laying business and handed over his business in Paris to John Malone, the American media magnate he reveres. Altice, its holding company, was founded in 2001.
Its successful foray into the United States began in 2015 with high ambitions. It was a failed attempt to buy what was then the nation’s largest cable company, Time Warner Cable. The owners, fearful of Altice’s playbook of using large amounts of debt to buy businesses, lay off staff and drastically cut costs, instead rushed into the arms of rival Charter Communications.
“Nobody wanted to touch that with a 10-foot pole,” Craig Moffett told MoffettNathanson. “Everyone in the industry reviled Altice, they had seen the film in Europe.”
Drahi opted for a more modest price instead: paying $28 billion for two subscale regional telecommunications companies, Suddenlink Communications and Cablevision. Altice would continue to flirt with an $185 billion bid for Charter in 2017, and in 2020 Drahi attempted to expand with an $8.4 billion (C$11.1 billion) bid to buy Cogeco, one of Canada’s oldest private media companies.
“The strategy was consolidation and it didn’t work out,” said Francois Godard, analyst at Enders Analysis. “The fish he wanted to swallow were just too big.”
Analysts said that although Altice USA has cut costs and sought acquisition opportunities, it has not invested enough in its network and services, causing customers to pull out in droves.
Although mobile customer revenues have increased significantly for competitors over the past year, this has not happened for Altice. It only added 5,000 wireless subscribers in the fourth quarter of 2021, bringing its total to 186,000. Charter, on the other hand, added 363,000 and Comcast 312,000.
Now Altice is in catch-up mode. It recently announced an agreement allowing its mobile customers to use T-Mobile’s national network infrastructure, which it hopes will pave the way for new Internet and mobile consolidation opportunities, and a wave of clients.
But the cost of everything from fiber construction to sales and distribution squeezes margins.
Investors are also worried about Altice’s exceptionally high leverage at a time when interest rates are set to rise. Net debt sits at about 6 times earnings before interest, taxes, depreciation and amortization, according to S&P Capital IQ, compared to Charter, which is 4.5 times and is already considered a highly leveraged company. Altice USA had $24.4 billion in net debt on its balance sheet at the end of last year, while Altice in Europe had €7.9 billion.
Most of the debt is well-denominated, with no bonds over $1 billion maturing until 2025, meaning the company does not face imminent liquidity problems. Still, given that the company’s net profit fell nearly 30% to $252 million last quarter, it will be under pressure to reduce its debt.
Dexter Goei, chief executive of Altice USA, conceded in a recent call with Morgan Stanley that he was considering spacing out payments on $1 billion that had been borrowed from its revolving credit facility.
“When you combine financial leverage and building fiber with fear of the future, it makes it a harder profile for people to mobilize,” said Nicole Abernethy, fund manager at Fidelity Investments. , which has reduced its stake in Altice over the past two years across a range of portfolios.
For Moffett, the problems with Altice USA testify to the limits of Drahi’s ruthless cost-cutting strategy at the outset. “Longer term, they’ve weakened the business and now they’re in cleanup mode,” he said. “We have grossly overestimated the market’s willingness to underwrite [Altice’s] turn around.”
Can fiber solve this problem?
The question now is whether Altice’s full-throttle fiber construction will be enough to turn its fortunes around.
While nearly every other cable company in the United States – Comcast, Charter and Cox – choose to stick with upgrades to their copper networks, Altice USA covers its entire existing network with state-of-the-art fiber. technology, which uses tiny wires. of glass to carry modulated light along the same underground pathways, increasing the amount of data that can be carried.
This year, the company announced its goal of reaching 6.5 million homes by 2025, costing $1.8 billion in capex in 2022 alone.
Altice said in a statement: “We are confident in our growth strategy, which focuses on accelerating the deployment of our fiber network as well as improving our products and overall customer experience, and remain optimistic. that by advancing these initiatives, we will long drive long-term sustainable growth and value for our customers and shareholders.
Drahi declined to be interviewed for this story.
Mark Salem, chief investment officer at Mount Capital, one of Altice USA’s top 15 investors, said he believed in its “long-term potential”. “Altice is ready to spend the initial costs to solidify its strong competitive position with fiber,” he added. “It’s a cash-generating business and the leverage ratios will drop once you get past the peak of ROI and subscriber growth. Now it’s about showing they can execute.
But the company faces stiff competition from telecommunications groups that are rapidly deploying fiber, including Verizon’s Fios, which overlaps Altice’s footprint in the crucial New York area, among other states.
Abernethy noted that the market might question whether Altice would be able to grow against a “tremendous fiber competitor” in Verizon, which had been “very heavily invested in a good consumer experience and a high-quality offering.”
“Altice could be an interesting story, but it’s a showpiece story at this point,” she said.
Yet few people believe that a successful fiber rollout is where Altice’s ambitions end. Rumors have been circulating for months that Drahi will aim to take the company private by buying back shares cheaply. But Goei was unequivocal that a private take is “on the back burner” and “not a topic for today.”
Yet others believe that Drahi always dreams of swallowing a bigger fish. That is, if the company’s depressed valuation doesn’t turn it from predator to prey.
One investor noted that: “Charter has a hole in its US footprint – it’s Altice.” Comcast could also be interested, although for both companies regulatory approval would likely be difficult to obtain.
He added: “Unless you believe someone comes in and buys it or Patrick Drahi privatizes it with a bounty, I find it hard to see why you would own it for the next 12-24 months. “