Cable M&A: What's Next After Suddenlink's Sale to Europe's Altice?
With Time Warner Cable the possible next target, one analyst says the Altice entry into the U.S. "creates even more uncertainty in an industry where virtually every element of the story is now in flux."
With European cable and telecom giant Altice last week announcing that it has agreed to acquire the seventh-largest U.S. cable operator Suddenlink, Wall Street is debating what the move will mean for the broader industry, which has already been in consolidation mode.
“Altice's decision to buy Suddenlink (at an unsupportably high price) creates even more uncertainty in an industry where virtually every element of the story is now in flux,” said MoffettNathanson analyst Craig Moffett.
“Another player emerges in U.S. cable,” wrote Wells Fargo analyst Marci Ryvicker in a report. “This transaction is expected to close in the fourth quarter and is Altice's first entry into the U.S. market, having many asking if this is a real competitor to John Malone” and his Liberty Media that owns a big stake in Charter Communications, which has been looking to grow via acquisitions.
Altice is Luxembourg-based, but best known for owning cable assets in France and other countries. It is run by billionaire Patrick Drahi, “who has been in the process of consolidating international assets via a leverage buyout model,” Ryvicker added. “According to various press reports, his vision revolves around the quad play — offering video, broadband, phone and mobile services.”
Most analysts agreed that the Suddenlink deal underscores how attractive consolidation was in U.S. cable. "Consolidation still makes all the sense in the world," said Moffett.
But they differed in their views on how aggressive an acquirer Altice would and could be in the U.S. beyond Suddenlink.
CEO Dexter Goei signaled on a conference call last week that the company was aiming for an approximate 50:50 balance between U.S. and European assets, amid reports that Altice has met with Time Warner Cable CEO Rob Marcus about a possible deal following Comcast’s decision to abandon its TWC deal amid regulators’ opposition.
Ryvicker expressed doubts that Altice could outright take over TWC. “We just don't see an Altice purchase of TWC:” she wrote. “TWC has a market cap of $44.5 billion versus Altice's $32 billion ... We ask why TWC would take Altice equity over Charter.” She added: “The regulatory risks are not any easier for foreign operators — and in fact include not only the FCC and DOJ, but also the Committee on Foreign Investments.”
Echoed Moffett: “It is hard to imagine that Altice could raise enough cash to mount a credible all-or-mostly cash counter-bid to one from Charter, which would suddenly look like a very soundly capitalized alternative.”
But Wunderlich Securities analyst Matthew Harrigan said that Altice's commentary was implying "$4.6 billion of incremental U.S. [operating cash flow] acquisition activity after allowing for $1.2 billion” after the Suddenlink deal. Harrigan said TWC was “now the belle of the ball” and highlighted that TWC has $9 billion in operating cash flow. He argued that this would be “certainly implying a likely tandem approach to the company” with Altice possibly partnering with Charter.
Harrigan suggested that Altice may not become so much a competitor to Malone and Charter, but a possible fellow consolidator. “Altice's U.S. curiosity [was] likely known and possibly actively fostered by Liberty and Charter,” he suggested. “As is well known, many Altice executives such as chairman Patrick Drahi and CFO Dennis Okhuisjen have worked at Liberty Global and it is more than plausible that Liberty was aware of the Altice Suddenlink bid, especially as Goei cited Altice's prolonged due diligence and conversations with multiple industry participants. The friendly social ambiance may have some resonance for future cooperation stateside and elsewhere.”
What about other cable operators beyond TWC? Cablevision Systems shares also rose after the Altice-Suddenlink deal news as investors have over the years often called Cablevision a possible takeover target if the Dolan family that owns it was open to a sale.
“On paper, Cablevision was already overvalued,” Moffett cautioned though. “And Altice's acquisition of Suddenlink, which has no overlap with Verizon FiOS, would suggest that they are quite cognizant of the appeal of a carrier without excessive fiber competition ...The spike in Cablevision's shares only makes that overvaluation worse. Then again, if Altice is willing to overpay for one investment, might they not be willing to overpay for another?”
Moffett also warned that Altice’s foray into the U.S. cable market would yield few financial benefits. “The combination of Suddenlink and Altice makes no sense,” he said in a report. “The idea that there are cross-border synergies in physical network operations is a fantasy. Meanwhile, Suddenlink is a well-run, albeit sub-scale, operator, so neither are there obvious "fixes" to support higher margins.”
Added Moffett: “Altice's targeted $215 million in synergies would suggest that they can cut 27 percent out of Suddenlink's non-programming/non-franchise costs, or more than $11 per subscriber per month ... Absent real synergies, there is one — and only one — lever to pull when video begins to suffer. Suddenlink is blessed to compete in competitively-advantaged markets (virtually no telco fiber overlap), so while broadband subscriber growth can be expected to remain steady, the real opportunity here, or necessity, if things go pear-shaped, is to spend Suddenlink's latent broadband pricing power. In short, expect higher broadband prices.”
Moffett famously said after the failed Comcast-TWC deal that the outlook for consolidation in U.S. cable was as clear as mud. After the Altice-Suddenlink deal, he said: “The outlook for M&A was already as clear as mud. It just got muddier. Yes, Charter still has the inside track to being the industry's consolidator. But if they have to overpay to consolidate, it would be a pyrrhic victory.”