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Altice to acquire 70% of Suddenlink – update post conference call

This is an update to our prior reports on Altice SA and Numericable-SFR (dated 13 May and 22 April, 2015).

Altice announced this morning the acquisition of 70% of  Sudddenlink share capital and its first move into the US market. The acquisition values Suddenlink at 7.6x synergy adjusted Ebitda based on a run-rate synergies of $215 million (10.1x Ebitda based on FY14 Ebitda). Suddenlink is the 7th largest US cable operator with 1.5 million residential and 90,000 business customers. In FY14 it generated $2.3 billion revenues and $905 million in Ebitda.

Suddenlink will become unrestricted subsidiary of Altice SA and the deal is expected to be closed in Q415. The deal will be financed with $6.7 billion of new and existing debt at Suddenlink, a $500 million vendor loan note from BC Partners and CPP Investment Board and $1.2 billion of cash from Altice.

Management updated on the call that it is targeting a 50% Ebitda margin at Suddenlink although US peers have a lower Ebitda margin average of approx. 36%. Management’s view is that there shouldn’t be a major difference between Europe and US profitability. In addition, management stated on the call that it is targeting US to become a larger portion of the business (of approx. 50%) and that it expects to be in the middle of US cable deals. Following Suddenlink acquisition, US will account for 12% of the group’s revenue and these clearly means that management will continue to seek for further deals in the US market (according to CEO even if it means some level of dilution). As for Altice France and the potential consolidation in the French market (we believe most investors were speculating on a Bouygues deal), CEO stated that Suddenlink acquisition “doesn’t effect in any way euro situation for continued expansion”. From a financial point of view, given the faster than expected realization of synergies in NUM-SFR the net debt/EBITDA ratio is estimated at 3.3 and should allow Altice France to issue additional debt for future deals.

Valuation

Following this morning announcement we updated our NAV analysis in order to reflect current market price of Altice share (€128) and NUM-SFR (€56), and the potential value of the new deal to Altice. We estimate the NPV value stemming for Suddenlink acquisition at €4-€5.5 billion range.

Prior to today’s acquisition the market reflected Altice stub a value of approx. €8 billion while we valued Altice stub at approx. 3 billion, based on an average of 9.2x EV/EBITDA on the projected Ebitda to FY15 of €2.0 billion.

Altice current market price reflects a stub value (Altice value-Numericable market value stake) of approx. €12.5 billion. We now add to the stub a value of €3.5-€4 billion in order to reflect Altice 70% share in the NPV of the estimated future synergies. This brings our stub to a value of 6.5-7.0 vs. current market value of €12.5 billion, indicating the stub is still significantly overvalued. However, following management statement today that it is targeting US to become a larger portion of its business and that it intends to take part in future consolidation in the US, we believe the market is now speculating on more M&A deals to come in the US (one of the speculation is a merger with Time Warner). We do not take a view on the likelihood of any particular transaction (in the US or in France), however we believe the focus of investors is now shifting more towards the US market.

At current market prices we recommend investors who have an open position to maintain it. However, we wouldn’t suggest to open a new position due to the potential for further US expansion which significantly increases the risk of this trade.

Regards,