Special Situations: SHORT Altice (ATC: NA) / LONG Numericable (NUM: FP)
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Since IPO’ed on January 2014, shares of Altice have soured due to a number of strategic initiatives and acquisitions carried out: (1) the acquisition of SFR, the second largest mobile and internet operator in France through its listed subsidiary Numericable; (2) The recent acquisition of Portugal Telecom assets which is expected to be completed in the second half of 2015; (3) The acquisition of a cable and mobile operator in the Dominican Republic; (4) the acquisition of Virgin Mobile; (5) in February 2015 Altice entered into a final agreement with Vivendi to repurchase its 20% stake in Numericable in a deal reflecting a share price of €40 to Numericable share, a discount of approx. 20% to current market price. Following this Altice will have a 78% stake in Numericable.
Through its acquisitions, Altice has demonstrated a proven ability to identify attractive acquisition targets with a track record of unlocking value through operational excellence, and the Company aims to continue to expand its business in the future through price-disciplined acquisitions.
Valuation & Investments strategy
We performed a NAV analysis of Altice shares based on the following assumptions and adjustments: (1) Net debt includes the Altice international net debt of €7.3 billion and holding company net debt of €5.4 billion; (2) Numericable shares were taken at market price of €51 per share; (3) Portugal Telecom assets were taken at 10x EV/EBITDA and a total debt of €5.7 billion was added to Altice net debt; (4) we assigned to Altice an additional €4 per share reflecting the added value from Vivendi deal (purchase price at a discount to market price); (5) the other unlisted cable assets were valued based on an average 9.2x EV/Ebitda; (6) we included a deferred Payment to Cinven and Carlyle by Altice S.A of €529 million which was paid in February 2015. Our NAV assigns Altice share a value of €82, a discount of approx. 20% to the current market price (€102).This indicates that the market is expecting more added value M&A deals to come.
In our view, most investors speculate on a Numericable-SFR acquisition of Bouygues Telecom in 2015, as Altice CEO stated a few months ago that "Numericable-SFR is the most natural buyer of Bouygues", and In February Bloomberg reported that Altice and Bouygues advisers had a formal discussion about a potential deal. A merger between Numericable-SFR and Bouygues should result with significant synergies and estimations in the market are for an NPV of €9-€15 billion. We do not take a view on the likelihood of such an acquisition but if it occurs we would prefer to be holders of Numericable share vs. Altice. Altice current market price reflects a stub value (Altice value-Numericable market value stake) of almost €11 billion while we value Altice stub at approx. 5.5 billion, based on an average of 9.2x EV/EBITDA on the projected Ebitda to FY15. This means the stub is significantly overvalued (even if we were to take 10x EV/Ebitda multiple). Therefore, we recommend to go SHORT ALTICE / LONG NUMERICABLE (we recommend to slightly over hedge Numericable vs. the corporate structure in order to be hedge against the more leverage structure of Altice).
Risks
Main risks include: (1) major acquisition made by Altice international outside of France with significant synergetic value which will exceed €5-€6 billion; (2) High financial leverage with current NET DEBT/FY14 pro forma EBITDA above 4; (3) the unavailability of high-yield debt markets at attractive rates; (4) Regulation and especially the French government which will probably want to limit job losses in the scenario of Numericable buying Bouygues.