Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Investors in French telecoms group SFR are trying to make a billionaire deal-maker blink. They could be waiting a while.

Tycoon Patrick Drahi this month offered to buy the 22 percent of SFR that his telecoms and cable empire Altice doesn't own already. Altice is offering 1.6 of its own shares for each SFR share, a small premium to the undisturbed price. The move aims to clean up Altice's structure after two years of debt-fuelled deals and get access to all of SFR's cash flow. It's cannily timed. Altice shares have risen 23 percent this year as fears about high-yield borrowers eased; SFR's have fallen 20 percent.

Market Timing
Altice's offer to buy out SFR minorities comes as the French telco's value is at lows rarely seen since Patrick Drahi bought it. It gives holders 8 Altice A-shares for every 5 of SFR, valuing the latter at 24.71 euro.
Source: Bloomberg

The snag is that SFR shares are stubbornly hovering 2-3 percent above the bid price, trading at a ratio of roughly 1.62 to 1.65 per Altice share. On Sept. 26 they closed at 26.795 euros, while the offer was worth 26.24 euros.

Buyers at these levels appear to be betting that Altice will go higher. If the shares hold onto recent gains -- regulators are still examining the offer -- Altice’s bid is in trouble. It would only make sense for SFR shareholders to tender if they held a big holding in Altice and wanted to support Drahi . Otherwise, they'd be better off selling their shares today and buying Altice with the proceeds -- assuming enough new SFR buyers are out there.

Ahead Of The Game
SFR's shares have crept above the value of Altice's offer since it was announced on Sept. 5
Source: Bloomberg

There would be some logic in Altice sweetening its offer to ensure full take-up. Altice could do with full access to SFR's dividends. Last year it would have received an extra 560 million euros from SFR's special dividend had it owned all the shares. With Altice nursing about 50 billion euros in debt, it won’t want further leakage the next time SFR returns a big chunk of cash.

Upping the exchange ratio to 1.7 would mean offering an extra 10 million Altice shares, worth 160 million euros. That's easily affordable for a group capitalized at 18 billion euros, and would involve minimal dilution. Nor would a small raise be overpaying. Analysts' price targets for SFR were about 33.50 euros before the exchange offer was made, and Altice predicts a second-half recovery for the operator in a tough French market. A fairness opinion conducted for SFR’s independent directors said an appropriate range for the ratio was 1.6 to 1.8.

Opposite Direction
Altice's French SFR is in the middle of a painful overhaul as mobile customers defect to rivals, while its newly acquired U.S. cable businesses are growing
Source: Company report H1 2016
Optimum is the new brand name for Cablevision. Q2 2016 figures for Suddenlink, Optimum strip out the effect of a big pay-per-view TV event that swelled revenue in Q2 2015. Q2 2016 figure for SFR excludes the effect of acquired media assets.

What's more, Drahi would curry favor with the investor community by being kind to minorities. That could come in handy when Altice seeks to list its recently-acquired U.S. cable assets in the coming years. But investors are taking a big gamble on him budging. The billionaire is betting that growth in the U.S. outstrips France, so wants to pay as little as possible for SFR. And the reality is that Altice doesn't have to own all of SFR today, even though it would like to.

Above all, Drahi may be reluctant to compromise his reputation as a tough negotiator. If his overriding concern is to avoid being seen to yield, Altice will let its offer lapse rather than raise it -- even if that sets up a re-match with the market for another day.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Altice has said about 75 percent of SFR holders are also owners of Altice.

To contact the authors of this story:
Leila Abboud in Paris at
Chris Hughes in London at

To contact the editor responsible for this story:
James Boxell at