(HSBC) Altice : Upgraded to Buy : M&A Growth Driven in US & Europe TP €162 from €101.
highest Price target in the market.
Upgrade to Buy: Gobble, gobble – still hungry for growth
* More scale: new Altice share class opens M&A-driven growth prospects in the US and in Europe
* Current high debt is sustainable given the prospects of efficiency gains in the companies already acquired
* Upgrade to Buy from Hold: new target price of EUR162 (from EUR101), taking into account potential from more acquisitions
** Running fast, but not without direction
After announcing the acquisition of US cable operator Suddenlink (20 May) and finalising
the acquisition of Portugal Telecom (2 June), Altice management is already talking about its
interest in KPN, BT Group or Telecom Italia (Bloomberg, 26 June 2015) in addition to
potential M&A in US cable (WSJ, 9 July 2015). We also think that consolidation in France is
still a possible scenario from next year despite a failed attempt in June. Hence, we expect
Altice to expand its footprint further in the next 12 months.
Is it too fast and/or too much? The very high pace at which the group is expanding is, to
our view, a function of the interest rate environment and the absence of competition to gain
control of its targets, rather than an uncontrolled shopping spree. These conditions will not
last for ever and Altice knows this. Does it already have too much debt? Rather than focus on
the EUR32bn consolidated debt, we prefer to consider each of the regional debt silos: France,
the US and the combination of Altice’s other assets together with the holding structure. Each
generates free cash flows that are higher than the service of the debt contracted to acquire the
assets. The US acquisition is on a separate credit pool with little recourse risk to the rest of
the group. Numericable-SFR in France will, according to our forecasts, deleverage rapidly.
Altice SA and Altice International debts are backed by the strong free cash flows at Portugal
Telecom. At present, the debt is mostly at fixed rates and without significant refinancing
before 2019. At that point, we calculate leverage would reach 1.0x in France, 3.6x in the
US and 4.8x at Altice International and the holding combined, levels that we think should
open access to the high yield market to refinance the debt by then.
New valuation, new rating: We raise our operational forecasts, driven by the consolidation of
Portugal, and add Suddenlink to our valuation. Our updated DCF-based sum-of-parts yields a
fair value of EUR130 (was EUR101) to which we add EUR32 from potential value creation
from accretive acquisitions. We set a new target price of EUR162 (from EUR101) or 10.2x
EV/EBITDA 2016. This is a premium to the sector (7.4x for telcos, 9.0x for cable), but
EBITDA CAGR 2015-17 (before further acquisitions) is 12% vs 5% for the rest of the sector.