With French telecoms consolidation dead, billionaire Patrick Drahi can't do his usual thing of buying his way out of trouble.
Instead his Numericable-SFR faces a year or two of unglamorous marketing campaigns and network-building to try to win back customers who've left France's second-place carrier in droves. The French deal's collapse also limits his room for maneuver in the U.S., where he snapped up cable operator Cablevision to cap a debt-fueled acquisition binge.
In the failed French deal, Orange was to buy third-placed Bouygues Telecom for 10 billion euros ($11.4 billion). To ease competition concerns, it would have sold about two-thirds of the target's assets to Numericable-SFR and low-cost challenger Iliad. Numericable-SFR would have paid up to 4 billion euros for a chunk of Bouygues' customers and some of its network.
That Drahi was happy to write such a big check shows how much value he placed on France going down from four to three operators. Numericable-SFR, 78 percent-owned by Drahi holding company Altice, could have gained one or two points of profit margin, analysts guessed. It would have cemented its position as a strong number two behind Orange.
Drahi faces particular challenges around lowering its "churn" rate, a metric for how many mobile customers it loses to other operators. For French operators on average, churn is about 15 percent a year, but at Numericable-SFR it's about 25 percent because its mobile network is worse than Orange and Bouygues. It lost 1.1 million mobile customers last year, although started to turn things around in the fourth quarter.
Without a deal, Drahi will just have to knuckle down and do things the old-fashioned way: winning back customers to return to sales growth (something he hasn't yet proven he can do). His French strategy is twofold: an extra 800 million euro in network investments over two years and using TV content such as English soccer to entice viewers.
Getting things right in France also plays into how much financial leeway Drahi has in his high-risk, high-reward U.S. cable expansion.
Numericable-SFR is the biggest part of Altice, bringing in 62 percent of 2015 revenue and 58 percent of Ebitda. France's contribution will fall to 47 percent of sales and 47 percent of Ebitda this year, once Cablevision completes, but the ability to pay down its eye-watering debt hinges on France.
Less competition in France would have meant more cash and profit at Numericable-SFR, boosting its share price and that of Altice and making it easier for them to cut debt.
And leverage is a concern at Altice. Its net debt stood at 35.5 billion euros at the end of last year, or 5.3 times Ebitda. After closing the Cablevision deal, it should be 48 billion euros with a pro forma Ebitda of 8.8 billion, according to Alphavalue analysts.
That said, lost in the deal news on Friday was S&P's upgrading of Altice debt from outlook negative to stable, largely because of strong profit and cash generation in 2015 and Drahi's promise to take a breather on acquisitions.
So while Altice's indebtedness does make its shares and those of its French operator sensitive to bad news, it seems a little unfair that Numericable-SFR shares plunged more than the other French telcos after the Orange deal's failure.
Over the long term, Numericable-SFR should be in a better position than Iliad or Bouygues, both smaller and less able to generate cash to spend on networks. As ever with Drahi, the question is whether the inveterate dealmaker has the skills for the mundane reality of running phone and cable companies.
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