French cable king Patrick Drahi is showing controlled ambition by extending his 28 billion euro ($32.4 billion) telecom empire stateside. Altice is buying 70 percent of U.S. cable firm Suddenlink from its private equity owners, valuing the company at $9.1 billion including debt, or 10.1 times last year’s EBITDA. The move is more considered than it might look.
Cheap debt has powered Altice into an M&A machine. In the last year or so, the group has spent nearly $35 billion on SFR and Portugal Telecom. Entering the fast-growing U.S. cable market – the backyard of Liberty’s John Malone, the U.S. cable king for whom Drahi once worked – suggests Altice wants to replicate its euro rollup in the United States. Suddenlink is the country’s seventh-largest cable operator with 1.5 million customers, and could serve as a springboard for further U.S. deals.
With all the existing acquisitions to integrate, overreach is a concern. Yet Altice investors, who have greeted the deal enthusiastically, have a number of reassurances. Instead of finding his way in a new market, Drahi could have gone straight for the $44.6 billion Time Warner Cable, which would have been a stretch.
Second, expected synergies of $215 million mean the Suddenlink deal’s headline EV/EBITDA multiple drops to 7.6 times, closer to what it paid for PT. Altice’s track record in cutting costs helps offset concerns that cross-border synergies are harder to achieve. It managed to boost EBITDA margins by 4 to 10 percentage points in subsidiaries across Israel, the Dominican Republic, Benelux and French overseas territories last year, according to Barclays research. Adjusted EBITDA margins at Suddenlink were 39 percent in 2014, below the mid-to-high 40s achieved in some of Altice’s other subsidiaries.
Lastly, Altice is only putting in $1.2 billion of cash. The rest will be covered by $6.7 billion in new and existing debt, plus a $500 million vendor loan from owners BC Partners and the Canada Pension Plan Investment Board. Leverage looks high at over seven times, but Altice reckons it can get down to 6.1 times if the company delivers on the synergies. The relative caution, and the fact that the private equity owners are sticking around for the ride, should convince investors that Drahi’s latest foray is worth backing.