Following the recent closing of its acquisition of Portugal Telecom, Altice SA, the France-based holding company that sits on top of a collection of telecom operators across the globe, made its first foray into the highly dynamic US cable market.
Yesterday CNBC and Reuters first reported that Altice had held talks about a potential merger with America’s second largest cable company, Time Warner Cable (TWC). Recall that TWC now is “in-play” following the recent dissolution of its planned $67bn (enterprise value) tie-up with Comcast. Not long after those headlines broke, the company announced its plan to buy a 70% stake in Suddenlink Communications for total consideration of $9.1bn. This deal for the seventh-largest US cable operator values the company at over 9x times its EBITDA – before any consideration of synergies that comprise a whopping 24% of Suddenlink EBITDA. While it is true that Suddenlink is a fast-growing cable operator in a field of players that are struggling to fight the impact of structural change, compare that to the 7.6x (before synergies) that Charter offered for control of Bright House Networks and the 7.9x valuation upon which the original Comcast-TWC deal was struck. But, as interesting as this migration north in enterprise values is, what we find so compelling about all of this is the global investment opportunities that will arise as a result of Altice making it very clear that this is just the beginning of its foray in the United States.
On the conference call for investors to discuss the Suddenlink deal, CEO Dexter Goei was unequivocal when describing Altice’s aspirations: the company intends to substantially increase its footprint in the US. Should this deal go through, the US footprint would represent 12% of Altice’s total revenue mix. But on the call Goei made it clear the intention was to increase that proportion to 50% over a timeline of around two years. But what is the composition of this 50%? Cable? Mobile?
Altice is quite partial to so-called “convergence” offerings. In many of its markets, it operates both fixed-line and mobile networks. Beyond the attractiveness of being able to bundle four services together – fixed-voice, mobile, video and mobile – it allows the company to harvest substantial cost savings by running data traffic from its wireless network over its fixed-line network. So while Europe is rapidly moving toward “convergent” offerings, the US is not, and Altice’s intentions in the US could very well serve as a catalyst to move the US toward “convergence”.
However, Goei made it clear that the company is reluctant to offer mobile too soon because it needs to “get material scale in this market before we think about mobile convergence”. Material scale? We love Suddenlink and are bondholders. With its rapid growth and minimal overlap with highly competitive fibre offerings from AT&T and Verizon, it has proven to be a good investment with low risk of irrevocable capital loss. But with 1.1m subscribers, “scale” it ain’t. TWC, with its 10.8 m subscribers, has scale.
Unfortunately for Altice (not so for TWC shareholders), Charter Communications is looking at ways to acquire TWC. That said, there is a lot to be done in the rapidly consolidating US cable market if the reluctant sellers of Cox Communications (4.1m subscribers) and Cablevision (2.7m subscribers) are willing to take some calls – now that pre-synergy valuation multiples have jumped. And once that scale is gained, what portends? T-Mobile USA? We know that majority-owner Deutsche Telekom is looking for buyers of this phoenix.
As investors in global credit markets, with experience of investing (both long and short) in Comcast, Charter, Numericable, Altice, Suddenlink, Time Warner Cable, and others over the years, we see excellent opportunities in the shifting US mobile landscape. This is especially true relative to the liquid credit investments in the European cable space, which are largely limited to the Liberty Global companies, which have traded beyond fundamentals-based fair value because the market is pricing in a high probability of a deal with Vodafone in, of all things, a “convergence” play.
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