The turnaround stars: Reinstate Altice at CL Buy, Numericable at Buy
*Leading turnaround track record : A PE company in public markets
Altice has a sector-leading turnaround track record, having increased the EBITDA margins of acquired companies over the past decade by 24 pp on average, at a pace of >500 bp per year. Its Executive Chairman and founder, Patrick Drahi, has demonstrated an ability to buy and sell assets at the right points in the economic cycle. We believe Altice is far more than a
diverse collection of cable/mobile assets – it is more akin to a private equity company, but it is using public markets to accelerate its M&A opportunity.
*Restructuring potential at SFR far greater than consensus expects
We believe the integration of SFR and Numericable will again demonstrate Altice’s cost-cutting capability. In addition we believe they can achieve the full run rate of targeted cost synergies (c.€1 bn) within just three years, a best-in-class performance on fixed-mobile integration, and find further efficiencies within SFR of €1.3 bn by 2018 – a similar underlying cost reduction vs. historical precedents. While such radical cost reduction will likely weigh heavily on sales, we expect Altice to reach its ‘mid-term’ goal of 40% EBITDA margins by 2017 (vs. 26% pro-forma in 2014E). We are 12%- 19% ahead of Bloomberg pro-forma consensus EBITDA estimates for Numericable in 2015/16 and model a 2015-18 EBITDA CAGR of 9%.
*Altice has up to €20 bn of M&A capacity over the next 4 years
The substantial margin increase at SFR should give Altice up to €20 bn of debt-funded M&A capacity over the next four years on our estimates, plus it can also use equity. We note that on 11/3/14 Altice offered up to €7.025 bn for the telecom incumbent in Portugal. Additionally, we continue to see a 40% probability of further consolidation in France. We believe Altice’s call option on Vivendi’s 20% stake in SFR-NMC adds further value to the group.
*Altice (CL Buy): M&A potential merits a premium, 12m PT €75
Reinstate Altice at CL Buy with 51% upside to our 12m PT of €75 (implying an 8% 2017E FCF yield). Despite lower quality assets than leading cable peers, we believe M&A potential will deliver even greater FCF growth.
*Numericable (Buy): SFR turnaround drives dividends, 12m PT €40
Reinstate Numericable at Buy, with 37% potential upside to 12m PT of €40 (implying a 9% 2017E FCF yield), catalysed by large earnings surprises.