After a debt-fueled acquisition spree, billionaire Patrick Drahi is embarking on a little house-cleaning.
On Monday, Drahi's Altice offered 2.4 billion euros ($2.7 billion) to buy out the shares that it doesn't already own in SFR, its largest European business. Instead of cash, investors will get eight new shares in Altice for every five SFR they already own.
The deal will give Altice, which is lumbered with more than 50 billion euros of debt, direct access to SFR's cash flow -- without having to share it with investors who own 22 percent of the French telecoms company. That leakage can be painful: when SFR paid a 2.6 billion-euro special dividend in 2015, about 550 million euros went to those minorities.
It will also simplify Altice's structure, removing one its two publicly traded businesses in Europe. That will help lay the ground for an IPO of Drahi's U.S. cable businesses in coming years.
For Altice, the deal will be accretive. According to analysts at ING, it gives SFR an enterprise value of 10.2 times operating free cash flow. Altice trades at 13.8 times on the same metric.
For SFR shareholders, the terms are hardly generous. At 24.72 euros a share, the offer values SFR at just 3 percent more than Friday's closing price. That's well short of the average analyst 12-month target price of 33.46 euros, according to Bloomberg data.
By midday on Monday, SFR shares were trading slightly above Altice's offer price, a sign investors could be pushing for a more generous offer.
They shouldn't hold their breath. Given Drahi already owns almost 80 percent of SFR, there's no justification to pay a control premium. There are no other likely bidders for the shares out there. Under French market rules, he can't change terms during the offer.
SFR shareholders therefore have a limited choice: if they don't tender their shares risk being stuck with a much less liquid asset. Altice shares already have about 3.5 times more liquidity than SFR's and that will rise to five times after the buyout.
But investors are unlikely to reject Drahi's offer and cling on to their SFR shares. Drahi's key pitch to SFR holders is that they'd be better off with Altice shares because they will have more upside from U.S. business. That's probably true.
Acquired in 2015, Suddenlink and Cablevision both enjoy growing revenue, a far less competitive landscape than France, and will still benefit from Drahi's cost-cutting.
In contrast, SFR is struggling with customer losses and stalling revenue, and cost cuts have mostly been completed. An attempt to consolidate the French market, which would have boosted SFR's earnings, failed in April. Analysts expect SFR's sales to fall 2 percent this year and Ebitda to remain basically flat, according to Bloomberg data.
As ever, Drahi's financial engineering is adroit. But even if the buyout succeeds, it won't affect Altice's ability to reduce its debt levels immediately. Altice is Europe's biggest issuer of high-yield debt. It shares are therefore closely to sentiment around high-yield debt markets. No amount of re-drawing corporate flow charts can change that.
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