Altice’s humbled boss faces battle to restore investor confidence
Patrick Drahi’s cable empire reins in M&A strategy to focus on operations
Patrick Drahi cut an unusually humble figure as he faced investors on an emergency tour of Europe last week, just days after he was forced to reinstate himself as chairman of ailing cable group Altice.
“He was pretty beaten down,” says one Altice shareholder who met with Mr Drahi. “The guy has just lost billions, it’s mind-boggling. You’re seeing a chastened guy who has been dragged through the mud.”
Shares in Altice have almost halved in the past few weeks, cutting the Moroccan-born billionaire’s personal wealth by billions of euros, after poor third-quarter results were compounded by worries over its high levels of debt.
Only a few months ago, Altice was linked with an audacious $185bn takeover bid for Charter Communications, the second-biggest US cable provider. Now, it is putting a halt to any new deals and changing focus to debt reduction. At the same time, the company is facing critical questions over its operational performance.
Mr Drahi is under pressure to show that he is more than just a financially-savvy deal maker, promising an overhaul of the company’s French telecoms business SFR and the shift in strategy.
“Today is not the time for excuses and explaining. It is the time for acts and facts,” Mr Drahi told an investor conference organised by Morgan Stanley in Barcelona in a rare mea culpa, admitting that SFR has suffered from a lack of focus, operational problems and poor customer services.
But investors were not all convinced, having heard similar promises in the past. Analysts worry about a business model seen as reliant on growth through debt-fuelled acquisitions, and needing support from a strong share price.
Rivals suggest that Mr Drahi has been backed into a corner, with Altice’s reduced stock market valuation making further ambitious M&A increasingly difficult.
“It’s a bit like saying I’m not going to drive my car because there’s no gas in it,” says an executive at a French rival. “Obviously Drahi can’t do acquisitions.”
But acquisitions are what Mr Drahi is best known for. The seasoned dealmaker has bought more than 30 companies in the past 15 years as Altice evolved from a project to roll up French cable assets into a burgeoning media empire.
In 2014, Altice acquired SFR, which still accounts for almost half of its revenues. More recently, it has turned its sights on the US, spending $27bn on the acquisitions of Suddenlink Communications and Cablevision before floating a stake in the combined business this summer.
This dealmaking has left Altice saddled with about €51bn of debt, much larger than the company’s €15bn market capitalisation and more than five times its earnings before interest, taxes, amortisation and depreciation. Investors want to see that Altice can manage the businesses that it has expensively assembled — particularly in France, its largest market.
“People will want to see a quick improvement in France,” says one investor. “Shareholders aren’t trusting Drahi any more because he stumbled.”
Francois Godard, an analyst at Enders Analysis, says: “Besides sustaining network deployments, to turn around SFR, Altice needs to abandon short-term fixes, invest in its workforce and customer service and differentiate through valuable innovation — in other words the opposite of the model followed so far.”
In Barcelona, Altice’s plight overshadowed the investor conference. The group’s presentation was brought forward by a day and, unlike many of the other sessions, it attracted a full house.
Dennis Okhuijsen, Altice’s chief financial officer, unveiled a “back to the basics” plan, pledging to shun M&A and expensive sports rights deals, and raising the prospect of non-core asset sales, including its mobile masts.
For many investors, it was a familiar story. Two years ago, Altice’s management had made a similar pitch to investors at the same conference: they would take focus on running the operations to halt a plummeting share price.
Mr Drahi, who owns 60 per cent of Altice, will take a more hands-on role, alongside trusted second-in-command, Dexter Goei, the former Morgan Stanley banker who has been forced to return as chief executive at Altice as well as its listed US subsidiary.
Mr Goei replaces Michel Combes, the veteran French telecoms executive brought in to oversee SFR’s turnround. Mr Combes resigned following the weak third-quarter results, which missed analyst expectations and revealed that SFR failed to stem the loss of broadband customers in France.
Michel Paulin, director-general of SFR, also resigned in September, with Altice promoting Alain Weill, SFR Media’s chief executive, to lead the group.
Mr Drahi seemed in little doubt about who was to blame, telling investors in Barcelona that “the main problem in France [was] the management”.
Several analysts disagree, noting that SFR has had four chief executives under Mr Drahi’s ownership and no shortage of strategic intent. SFR has spent about $1bn on content such as sports rights to add to its telecoms bundles. But the company still lost about 75,000 broadband customers in France in the three months to the end of September.
SFR also wants to roll out superfast fibre telecoms networks in France, even as it deals with disquiet around a redundancy programme that will cut a third of its workforce.
Analysts warn that Altice is trying to do too much, too quickly. The company is regarded as expert cost-cutters but questions remain about its ability to drive growth.
Simon Weeden, an analyst at Citi, says: “Altice has a reputation for trying to do everything in a hurry.”
Stephane Beyazian, a research analyst at Raymond James, says management targets set by Mr Drahi also looked contradictory: “Stabilise the customer base but significantly raise prices, or stabilise the customer base but lay-off 5,000 employees (this year), or increase cash flows but massively invest in content, or increase cash flows and work on a plan to cover 100 per cent of French homes with fibre.”
Mr Drahi still has plenty of supporters, with many seeing him and Altice as Europe’s version of John Malone’s highly successful Liberty Global cable empire.
Altice’s US business is also a bright spot — growing 19 per cent in the third quarter while SFR and the group’s Portuguese telecoms operations struggled.
One shareholder says the share price sell-off was “completely overblown” and arguments about its debt overload looked “thin” given that there are no major maturities coming up for renewal until 2022.
Others agree that the share price has sold off too much, citing Altice’s high leverage, hedge funds closing out positions before year end, and poor communication by the company as reasons for such a sharp fall.
But Mr Drahi will need to show discipline to convince the market that he can deliver a turnround of SFR. He said last week that the French setback has shifted back his plan to increase earnings by a year. But “it doesn’t change [the] plan,” he added.
Later, he told investors: “I fixed the cable business in France, I will fix this now.”
The €51bn debt at the heart of Altice
Altice’s debt-raising strategy is similar to John Malone’s Liberty Global, where Patrick Drahi began his career and chief finance officer Dennis Okhuijsen was previously treasurer, writes Robert Smith in London.
Like Liberty, Altice splits its €51bn of debt across several distinct “silos”, which means bond fund managers are less likely to run into credit concentration limits that restrict them from owning too much debt from one company.
But unlike Liberty, Altice also has debt at holding companies that sit above multiple operating companies, such as the €6.2bn of debt at the Altice Luxembourg entity that controls the company’s French and international businesses. Investors have long expected Altice to “push down” this debt into the operating companies in order to more closely mirror Liberty Global.
“What bondholders want to see is what shareholders want to see: execution, top-line stability, and, in particular, delevering,” says Mitch Reznick, co-head of credit at Hermes Investment Management. “This means that shareholders’ and creditors’ interests are aligned for the moment, because the path to shareholder remuneration in the coming months is for Altice to do the kinds of things that bondholders want to see.”
Several bond investors say that there is now confusion over Altice’s plans for the holding company debt, after Mr Okhuijsen last week outlined several contrasting options that could be used to “simplify” the company’s structure.
These comments caused the cost of buying five-year credit-default swaps (CDS) on Altice Luxembourg’s debt to surge from 175 basis points to as high as 500 basis points. This is because traders who had bet on the derivatives contracts becoming worthless — because the underlying debt would be retired — had to unwind their positions.
One Altice bondholder says that this CDS move had hit his fund, but added he was not worried about the long-term outlook for the company’s debt.
“Most of the bonds are still trading above par even after the leg down [on Tuesday], so there doesn’t seem to be a concern that this is a ‘house of cards’ type situation,” he says. “Unlike some other roll-ups their ‘like for like’ disclosure has always been very good, so while they’re an M&A heavy business they haven’t been using this distort operating numbers.”