Patrick Drahi's bagging of the French TV rights to English Premier League soccer isn't quite up there with Rupert Murdoch's sports rights largesse. But it does show one thing: the billionaire cable investor knows there's more to running a business than just taking an ax to costs.
Drahi's Altice has delivered impressive savings in France since his Numericable cable operator bought phone carrier SFR from Vivendi this year. In the third quarter it lifted operating cash flow by 53 percent and delivered an adjusted Ebitda margin of almost 38 percent.
Yet the market has, rightly, marked the company down, in part because of worries about a lack of revenue growth at both Numericable-SFR and the parent Altice. There's also been the small matter of securing the financing for its $17.7 billion acquisition of Cablevision in the U.S., not to mention that net financial debt is expected to be a dizzying five times adjusted Ebitda this year, according to Kepler.
The longer-term concern for Drahi is whether he can sustain the kind of cash flow generation that supports his debt-fueled acquisition binge in Europe and the U.S. Cost cuts, however impressive, are only part of the answer; sales need to do their bit too. And here there are valid concerns, with Numericable-SFR posting a 3.5 percent revenue decline in the third quarter and Altice a 3.8 percent fall on a constant currency basis.
While Altice insists it will maintain a "cost-light" management structure despite its break-neck expansion, it has stated that investments will be heavy. That means capital expenditure will be more than 4 billion euros ($4.2 billion) a year. This is essential in France, where the SFR network is trying to keep pace with rivals in 4G coverage and super-fast broadband. The reported 100 million euros a year it will lavish on English football is a recognition that it must reinvest some savings or lose customers.
The stock has more than halved over the past six months as Drahi takes on ever-greater debt to fund U.S. deals. Investors have also fretted about whether he can deliver on his promised cost cuts and adapt to a future that will be more about the nuts and bolts of operational management than M&A.
A technical drag on the shares was removed this week when Drahi, 52, paid off loans he'd used to buy Altice shares in its IPO, removing the possibility of a margin call that could have depressed the stock further.
As Erhan Gurses of Bloomberg Intelligence points out, Altice's enterprise value is now 5.8 times next year's expected Ebitda, leaving it rooted -- like the Premier League's Aston Villa -- to the bottom of a table of its peers. The company is promising to knuckle down by integrating all those deals and Drahi's mentor John Malone has prospered with a similarly relaxed relationship with debt. Yet until the French billionaire shows he's as fleet-footed in delivering synergies in the U.S. as in Europe, an element of caution is natural.
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