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Double vision

17 Sep 2015 By Fiona Maharg-Bravo

French cable king Patrick Drahi appears to be keeping his powder dry after snapping up U.S. cable firm Cablevision for $17.7 billion, including debt. It is the second foray into the United States for his telecom company Altice after its recent $9.1 billion swoop for Suddenlink, and will create the market’s fourth-largest player. The valuation, at just under 10 times the AOCF (a variant of EBITDA) to June, looks high but savings will help. Importantly, Altice isn’t contributing much cash.

The move isn’t exactly a surprise given Drahi’s U.S. ambitions, even if it comes earlier than expected. Suddenlink hasn’t even closed. The rationale for the larger deal looks similar: hack costs to the bone. Cablevision, which operates in the New York metropolitan area, already has high broadband penetration but seems ripe for Altice’s famously rigorous cost treatment. Its cable unit delivered EBITDA margins of 32 percent last year – well below Suddenlink’s 39 percent EBITDA and the mid-to-high 40s achieved in some of Altice’s other subsidiaries.

Altice expects a punchy $900 million in synergies as well as $150 million savings on capex spending, which would reduce the headline enterprise value to EBITDA to 6.1 times. But savings imply an overall margin of 44 percent, Deutsche Bank analysts reckon, a tall order given high content costs in the United States. There may also be economies of scale from scrunching the two together.

As with Suddenlink, Altice is only contributing a sliver of equity. It will put in $3.3 billion of cash by issuing shares. The balance will come from $14.5 billion in new and existing debt at Cablevision, plus cash on hand. BC Partners and Canada Pension Plan Investment Board have the option to buy 30 percent of the equity, reducing the costs further. This leaves leverage at Cablevision – which will retain an independent capital structure – at over seven times. But Altice reckons it can get down to 4.9 times including synergies.

All this makes the latest multibillion-dollar deal a fairly low-risk proposition for Altice shareholders. Debt should be equivalent to a still-punchy five times 2016 EBITDA after the deal, analysts at Goldman Sachs estimate. But there is a clear risk of overreach, considering recent jumbo deals in Europe. Altice has yet to prove it can make its U.S. deals work.


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