Deals

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.

It looks impossible to an outsider. But if you were in Patrick Drahi's shoes, why wouldn't you try making a $184 billion bid for Charter Communications Inc.?

If the French telecommunications billionaire succeeded, he would take control of the second-biggest high-speed broadband provider in the world's most profitable telecoms market. The cost of failure? Not much more than ruining his bankers' August holiday.

Big Bite
Charter's enterprise value dwarfs that of Altice
Source: Bloomberg

It would be a Herculean leap. Charter's enterprise value is four times that of Altice USA, Drahi's recently listed U.S. cable company, and almost twice that of his holding company, Altice NV.

Charter doesn't need a deal and is awash with suitors, as Gadfly's Tara Lachapelle has pointed out. What's more, Drahi would need to win over tycoon John Malone, who has 25 percent of Charter's voting rights -- and whose strategy Drahi has spent his career imitating.

Here's how a deal could be structured.

First, it should be possible to pay Charter shareholders some cash by gearing up the combined company, in effect using the unused borrowing power of Charter. Combined net debt in the first quarter was $80.5 billion, a little more than four times the two companies' forecast Ebitda of $19.3 billion for this year. Go crazy and try pushing debt to new limits, as is the Drahi way. How about 7.5 times Ebitda? The extra borrowing capacity would, in theory, let him raise $65 billion. 

The two companies have a total market value of $144 billion. Deducting the additional debt would take that to around $80 billion. Offer Charter shareholders a 70 percent stake in the combined company, and they would have shares worth $56 billion. The cash and their stake in the merged group would be worth $121 billion -- the same as Charter's current market capitalization, which has already arguably been inflated by some bid speculation.

Altice could also be less reckless and settle for leverage of six times net debt-to-Ebitda. That would leave Charter shareholders with less cash, but owning closer to 80 percent of the new company.

The beauty of such a structure is that Drahi would still be in control. Altice USA stock has one vote per share, but Drahi's Altice NV controls it through special shares that have 25 times more votes. If Altice USA issued a 70 percent stake to Charter shareholders, they would still have only 12 percent of the total votes.

It's far from certain that Charter shareholders would jump at such terms. Drahi will have to persuade them that he can find cost savings and up-selling opportunities to make the enlarged company more profitable than Charter under its current management. Those synergies could be worth about $29 billion in today's money, according to New Street Research.

Something Right
Drahi's cost-cutting ways have delivered higher Ebitda margins in the U.S. than larger rivals
Source: Company reports, Bloomberg

Altice has already shown at Cablevision and Suddenlink, the two U.S. cable companies bought about 18 months ago, that it can improve Ebitda margins and accelerate revenue growth.

Even Malone can't sniff at such progress. Maybe he could be won over by offering him some shares with super voting rights, or other governance trinkets.

These are all big ifs. Drahi could also try and bring in private-equity partners to provide a bit more firepower, allowing him to up the cash part of the bid.

Even so, it's hard to see any deal working that doesn't involve persuading Charter shareholders to swallow a lot of stock with weak voting rights for the sake of taking a ride on the Drahi train.

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

To contact the authors of this story:
Leila Abboud in Paris at labboud@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net