Billionaire Patrick Drahi's huge debt refinancing at France's Numericable-SFR is a sign of things to come. He's imitating his mentor-turned-rival, Liberty Global's John Malone, in trying to turn his Altice holding company into a telecom-and-cable empire fueled by high-yield debt.
For Drahi, the challenge is to manage Altice and its units' 50 billion-euro ($57 billion) debt pile while nursing its operations in France and Portugal back to growth.
In the single-biggest junk bond sale this year, Numericable-SFR nearly doubled the size of its offering to raise $5.19 billion due in 2026. It will use the proceeds to refinance and extend debt maturities, effectively getting about two more years of breathing room.
It may seem surprising that the company is willing to replace a 4.875 percent coupon bond with a 7.375 percent security, especially one with three years to go before it's due. But once the proceeds are swapped into euros, the rate is actually about 5.7 percent. The extra interest cost is around 80 million euros a year -- hardly a sum that should worry investors very much.
And Drahi didn't really have much room to wait. Credit rating agencies tend to get skittish when high-yield issuers leave themselves with only two years to go before maturities hit, according to David Cox, a strategist at Bloomberg First Word. The debt markets have recovered a bit from their worst in February, and Numericable-SFR was probably right to strike while the market's open -- who knows how long that will last.
It's a better-safe-than-sorry type of move that makes even more sense given the tumult in France after Orange and Bouygues called off talks over a deal that would have taken the telecoms market down to three players.
Numericable-SFR had been preparing this debt deal to help fund buying up assets from Orange to help quell antitrust concerns. It was supposed to buy a chunk of customers and part of Bouygues' network for up to 4 billion euros, helping offset massive mobile customer losses last year and getting an easy profit boost. Instead, Drahi will have to turn around Numericable-SFR the old-fashioned way, through network investments and marketing savvy. Proceeding with the debt sale anyway signals his commitment to prudence.
Drahi looks to be following a script written by Malone, who built Liberty Global into Europe's biggest cable company a decade ago through debt-financed acquisitions coupled with a measured push to win investor credibility by delivering steady revenue and cash growth. He even hired Liberty's former finance guru Dennis Okhuijsen as his chief financial officer.
Altice has also borrowed Liberty's technique of spreading debt across national subsidiaries and parent companies. The aim is to limit risk by preventing, for example, the debt of Altice's European businesses from being carried by its U.S. cable companies. While the parent can suck up money from these debt silos, there are limits on how and when it can do so.
To make this highly leveraged model work, debt has to be actively managed. You need to have credibility with investors so as to be able to issue at favorable terms and in massive quantities.
Malone spent years building up that reputation, and Liberty became known for doing regular refinancing deals to amend and extend its debt. Numericable-SFR's new bond is a good first step in that direction.
The real issue is that Drahi has been trying to execute a Liberty-esque strategy at warp speed, snapping up companies before proving that he can actually run them well. He's shown that he knows how to massively cut costs and make the companies he buys more profitable. But he's now in a more difficult phase of returning to sales growth.
Investors are still trying to evaluate whether they think he will succeed, and Altice shares have halved in value since last summer. He won't turn into Malone overnight.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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