Gadfly

Cable Billionaire Gets a $58 Billion Debt Reminder

Patrick Drahi's Altice has little choice but to lift investment in France.
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Photographer: Christophe Morin/IP3/Getty Images

Leverage cuts both ways. If anyone needed reminding of how debt amplifies the bad as well as the good, look at telecoms group Altice NV. Shares in the company controlled by billionaire Patrick Drahi have fallen 36 percent since last week's poor quarterly numbers. On Thursday, the CEO left and Drahi returned center stage.

The rapid fall in the stock is a simple function of Altice's leverage. Third-quarter results missed expectations, although not hugely, and there was a modest cut to 2017 guidance. The group's market enterprise value has since fallen 12 percent to 70 billion euros ($81 billion).

That includes about 50 billion euros ($58 billion) of net debt, worth 5.3 times trailing Ebitda. With such borrowings, any market reassessment of the enterprise value hits the equity sharply.

The central problem is that Altice is shrinking in France. Its main asset, SFR, suffered falling revenue in the quarter and over the first nine months of the year. This reinforced the prevailing concern that Altice management is good at cutting costs at the assets it acquires, but struggles with running them for sustainable growth. If it can't do that, it can't grow into its debt.

The high borrowings aren't an immediate problem. No big refinancing is required for four years. A less levered structure would reduce share-price volatility, but there's no pressing need to raise equity—just as well given the share price fall.

The simply reality is that Altice needs better operating performance. The departed boss, Michel Combes, ripped cost out of Alcatel-Lucent SA. Such skills can only grow profitability so much.

Altice must win the loyalty of SFR customers and attract new ones. With its bonds and shares hit hard, the temptation for Drahi would be to go for quick wins, slashing more cost and investing in price cuts to try to expand subscriber numbers. This would only inflame the price war in the French market, prompting copy-cat moves and generating yet more customer churn.

To build enterprise value, Altice has little option but to invest more in making its service more enticing to customers. Adding exclusive content is central to this, as Altice knows having acquired future rights to Europe's Champions League soccer tournament. The strategy offers credible upside and is under-appreciated, analysts at New Street Research argue. Drahi needs to stick with it, and do more.

This will be slow and expensive. There will be less cash available for seemingly investor-friendly actions like buybacks.

Altice trades on 7 times the next 12 months' expected Ebtida, a 22 percent discount to peers. The leverage means it's hard to call the bottom for the share price but the valuation provides some support.

That isn't the whole story, though. There are reasons not to like Altice. The governance puts Drahi in firm control, and analysts crave more disclosure. Drahi may feel he can ignore such concerns when things are going well. Now they are not.

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

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