America's Hated Cable Providers Face a New Kid in Town
Cable providers often rank among the most hated American companies in consumer surveys, reviled for opaque billing practices and shoddy service. Among investors, though, the sector is well liked for its growth, benign competition and penchant for share buybacks. Just look at the returns from industry leaders Charter Communications Inc. and Comcast Corp:
With that backdrop, Franco-Israeli billionaire Patrick Drahi shouldn't have too much trouble selling shares in the U.S. operations of his holding company, Altice NV. Investors will no doubt be eager to buy into the fourth-biggest American cable operator, helped by the paucity of listed peers and the relatively small slice of shares on offer. Most of the float will come from BC Partners and Canada Pension Plan, who together own 30 percent of the U.S. business, since Altice wants to keep control.
Despite being smaller than its rivals in the country, Altice has big ambitions. It's in a hurry to list because it wants an acquisition vehicle ahead of an expected wave of deals in the U.S. sector. Drahi and his lieutenants are trying to show they can run cable companies better than their American counterparts by using lessons learned in the more competitive European market.
While it's early days still, Altice has started well with the integration of two U.S. companies it has bought already, Suddenlink and Cablevision (now rebranded as Optimum). Using Drahi's usual method of cost cuts and network upgrades, sales are growing faster and margins have risen.
It's a neat riposte to the skeptics, who said Altice USA's cost-cutting targets of $900 million at Optimum and $215 million at Suddenlink would degrade service and send customers fleeing. Drahi's mentor John Malone, the so-called "Cable Cowboy" who owns a big stake in Charter, was chief among the doubters. Charter executives promised smaller synergies from their own recent acquisitions despite their company being four times as big. Yet instead of Altice stumbling, Charter has lifted its own cost-savings target from $800 million to more than $1 billion.
One has to wonder whether Malone and his posse aren't feeling a little pressure from his one-time apprentice. This is certainly what happened in Europe as Altice steadily improved margins and efficiency. Vodafone Group Plc and Deutsche Telekom AG suddenly got religion about the importance of procurement costs and aggressive budgeting once investors started to ask: what's Altice doing that you're not?
As Altice pitches its IPO to investors, it'll probably make the case that its fatter margins (see the chart above) mean it deserves multiples on a par with Charter. That's probably a little rich given the slower growth prospects for the Altice business and the fact that Drahi and his team remain relative unknowns compared to Malone. Charter's enterprise value is 10.3 times forward Ebitda, according to Bloomberg data, compared to about 8.4 times for Comcast, which suffers from a conglomerate discount because of its media assets.
If the new kid in town can shoot for somewhere in the middle of those two multiples, he should be pleased enough.
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