Altice's Debt Diet Needs to be Stricter
Faced with a dramatic meltdown in the share price of his holding company Altice, telecoms billionaire Patrick Drahi turned to the right playbook.
More communication about the strategy, more transparency about inter-company financial arrangements and a pledge to cut debt through asset sales was all necessary. The concern now is that selling the lowest-hanging fruit won't be enough.
Restoring investor confidence won't be easy: Altice, the owner of France's SFR mobile network, has 50 billion euros ($59 billion) of net debt and the highest leverage multiple of its peer group.
The promise of asset sales reflects the urgency of Altice's situation. The company plans to offload some transmitter towers to operators Cellnex Telecom SA and TDF, according to Bloomberg News. But recent deals suggest about 10,000 towers -- about 50 percent of SFR's estimated total -- would need to be sold just to raise 1.5 billion euros.
The FT reported on Thursday that Altice is considering a sale of its network in the Dominican Republic, which it bought from France's Orange in 2013 for $1.4 billion.
Based on adjusted underlying earnings of 372.9 million euros in 2016, and using current European peer-group multiples, the unit's enterprise value would be close to 2.4 billion euros today. Such numbers are objectively big. But Altice's indebtedness would still be twice the average of its peer group, even if net debt fell by 10 billion euros, Bloomberg data suggests.
The gains from small asset sales look limited. Logically, Drahi has to move onto more valuable gems. While these would be more painful for Altice to part with, they would likely attract more suitors.
Most bankers don't believe the pressure will rise enough in the near term to push Altice to do what Credit Suisse analysts call a "last resort" deal, like selling a core operation in the U.S. or France. The company has money in the bank and, with capital expenditures easing, free cash flow generation is set to rise to 3 billion euros in 2019 from 1.3 billion euros this year, according to Bloomberg. Altice won't face a major refinancing until 2022.
But the confidence shock has been dramatic, and expectations that the company can deliver growth to match its debt spree have been dented. Ratings company S&P Global Ratings cut its outlook on Altice to negative from stable on Thursday, warning that underlying profit in France will shrink through 2018.
And while we are years away from a major refinancing, annual debt servicing costs are still in the billions. Next year, 2.7 billion euros in interest payments and 1.5 billion euros of principal will fall due, according to Bloomberg data. More aggressive asset sales can't be ruled out.
Drahi's actions have stabilized Altice's shares at about the 8 euro level, putting them at a slight discount on a price-to-earnings basis to their European peers. But execution risk leaves room for further negative surprises -- just as earnings estimates for other European telecommunications companies are being increased.
With little room left for sweeteners like share buybacks in the face of debt that needs to be repaid, Altice risks becoming yet more unfriendly to shareholders bracing for a Drahi diet.
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