Deals

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

Patrick Drahi is looking for new investors to help him crack America. The tycoon behind European telecoms giant Altice NV may list its U.S. business later this year, creating a new company that will jostle for attention with the much larger Charter Communications Inc.

Drahi needs to realize that investors will take some persuading to join his mission.

An IPO of the Altice USA business -- the market number four -- aims to create an acquisition currency at a time when consolidation is expected to accelerate under an accommodating President Donald Trump. The investment pitch would be the opportunity to participate in another Drahi acquisition vehicle with room to grow profits as he's done in Europe.

Still Small
Altice remains smaller than U.S. rivals so wants to grow via acquisitions.
Source: Company reports and SNL Kagan.

But if Altice USA wants to aspire to Charter's valuation multiples, Drahi and his lieutenants need to prove they can run U.S. cable businesses more profitably than their American counterparts. That's a tough task given that Altice has only had control over Suddenlink, the first operator it bought, for a year, and the second, Cablevision for half a year.

At Suddenlink and Cablevision (now rebranded as Optimum), Drahi is slashing costs and investing in network upgrades, following the usual Altice method. Sales and margins have picked up.

But it'll take more time to calm fears that the aim to cut $900 million out of Optimum's operating costs and $215 million out of Suddenlink's won't jolt the businesses off course. Proof will also be needed that a planned fiber upgrade won't lead to an increase in capital expenditure.

What's more, Altice's track record at French telecoms group SFR Group SA, its biggest business, has been mixed. Cost cuts boosted profitability but customers fled in droves because of network weakness. In fairness, the French and American situations are different -- SFR sales were declining before Drahi arrived, while the U.S. companies were in good health -- but a parallel will be drawn. France will dog Drahi until Altice shows it can return SFR to growth.

Deep Cuts
SFR has lower sales now than when Altice bought it but profitability has improved.
Source: Bloomberg, company reports

The IPO has some things going for it. Investors have pushed up rivals' shares recently. There are few listed peers, and Drahi won't be selling a lot of stock -- he'll want to keep control -- so the offer should be digestible. The exact size will depend on how much two private equity funds that own 30 percent of Altice USA want to sell.

The snag is valuation. Charter's enterprise value is 10.1 times forward Ebitda, according to Bloomberg data, compared to about 8.2 times for Comcast Corp., which gets tagged with a conglomerate discount for its media assets.

But Altice USA is expected to grow sales less quickly than Charter in the coming years, analysts forecast, so it arguably deserves a discount too. It's got a smaller customer base on which to spread content costs, which are much higher in the U.S. than Europe. What's more, Charter's investment case is boosted by the $1 billion or more in synergies it is looking to harvest from buying Time Warner Cable last year.

Meanwhile, Drahi is still relatively unknown in the U.S. compared to John Malone, the "cable cowboy" behind Charter who investors have come to trust. Malone has seeded doubts about Altice's cost-cutting targets given that Charter's are lower yet the company is four times bigger.

Drahi will need to be reasonable about the IPO price despite his reputation as a fearsome deal negotiator. Say the company should trade somewhere between Comcast and Charter, listing at 8.5 to 9.5 times last quarter's annualized Ebitda would imply an enterprise value of $29.5 billion to $33 billion and an equity value of $8.5 billion to $11.9 billion, according to Bloomberg Intelligence analyst Geetha Ranganathan. 

Swallowing the lower multiple might be embarrassing given Drahi's aspirations. But a little short-term awkwardness would be a price worth paying to win some happy investors and earn their loyalty for the road ahead.

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

(A previous version of this column was edited to update Charter's expected synergies from buying Time Warner Cable.)

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net