A bunch of French guys are setting out to demonstrate to investors that they can run U.S. cable companies better than their American counterparts. Based on their experience, they have a good chance at success -- but some patience is required.
Patrick Drahi's Altice yesterday closed on its $9.1 billion acquisition of St. Louis-based Suddenlink Communications. The French billionaire has also agreed to acquire New York’s Cablevision for $17.7 billion, which if finalized by mid-2016 will turn Altice into the fourth-largest U.S. cable provider.
Drahi and his crew aim to apply a formula they developed for France's Numericable-SFR, which they bought one year ago: Cut costs on everything from software to salaries, upgrade networks and sell content to revive profitability. So far, Altice has proven it’s good at trimming the fat; the more complicated tasks of restoring sales growth and winning back mobile customers put off by its poor 4G network are also coming along, but will take more time.
The U.S. is likely to follow the same pattern.
At the heart of Drahi’s U.S. plans are promises to eliminate $215 million in expenses at Suddenlink and $900 million at Cablevision, or about a third of its non-programming cost base, according to MoffetNathanson Research.
The targets prompted incredulity from some analysts and barbs from U.S. cable king John Malone, whose Charter Communications is in the process of swallowing Time Warner Cable. These critics argue that Altice's savings estimates at Cablevision can't be right since Charter is aiming for $800 million in reductions from Time Warner Cable on a revenue base that's four times as large.
Altice counters that running cable assets in Europe, where revenue per subscriber is one-third that in the U.S., means it has developed know-how and stricter discipline than its American counterparts. (Drahi once memorably remarked that he hated paying high salaries, while Altice CEO Dexter Goel said it was an aberration that some 300 Cablevision managers made more than $300,000 a year.)
Competition in the U.S. broadband market is also more benign: Cablevision doesn't compete with most of the other big U.S. cable providers because they are in different markets. Verizon is its one serious competitor, whereas Numericable-SFR has three.
Drahi's promises for the U.S. become less absurd when you look at how he has operated at Numericable-SFR. There, Altice showed that its shock troops are good at slashing costs on the “easy” stuff. They axed overpaid managers, squeezed suppliers, and replaced computer systems to achieve almost three-quarters of the deal’s promised 1.1 billion euros ($1.2 billion) in operating costs savings in only nine months.
Only recently have they embarked on phase two: Higher investment in marketing, network upgrades, and exclusive content rights so as to deliver on the rest of their plans.
For example, Numericable-SFR has decided to plow more money into laying down fiber lines into homes so it can reduce its reliance on renting such capacity from competitor Orange. Once completed, the upgrade will allow the company to save about 900 million euros, nearly double its original cost-savings target. No budget or timing for the project was given.
So what does all mean for the U.S. cable expansion? Altice will probably succeed pretty quickly in trimming fat from corporate overhead and inflated salaries at Cablevision, although Suddenlink is already well run.
RBC analysts estimate that Cablevision's operating expenses per subscriber per month are more than $80 compared to around $50 for U.S. cable peers such as Charter and Suddenlink, and $24 to $37 for European cable groups.
But achieving the full cost savings target at Cablevision could take three years or more and may require some upfront spending first. If investors can handle that, then they should give Drahi some time to show what he can do.
It might be a bet worth making: While Altice shares are down more than 60 percent from their peak in June, the majority of analysts tracked by Bloomberg that rate Altice say it's a buy. The consensus price target is almost 23.9 euros, almost double the current share price. That may convince some investors to give Drahi the benefit of time.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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