Altice offers rewards - but it is not for faint-hearted
There is a simple way to create a large business, even in a sector famous for its hotshots. The secret is to find a really accommodating banker; borrow like there's no tomorrow; then spot some interesting cash-generating assets to spend on and proceed to ruthlessly cut costs so that cash flows cover the ever-swelling interest rate bill. This brave tactic is the 'modus operandi' of the company we have under the microscope today, the Dutch telecoms group Altice which has quietly built an extraordinary world market position.
Altice, incorporated in Luxembourg and listed in Amsterdam, has operations in France, Israel, Portugal, US and other far-flung parts of the globe including the Dominican Republic. With a market value of €26bn, it is a holding company for concerns that provide cable, fixed services (TV, internet and fixed lines) and mobile communications to residential and business customers. Since its initial public offering in 2011, the company has embarked on an expansionist strategy, funded by the previously-mentioned bank borrowings. Its assets include Societe Francaise de Radiotelephone (SFR) in France, PT Portugal, HOT in Israel, Tricom in the Dominican Republic and cable operations in the US.
It recently entered into a partnership with Sky to co-produce a TV drama, 'Riviera', which was created by Dublin director Neil Jordan.
Altice's founder, Patrick Drahi, has an interesting background. Born in Casablanca, and educated in Paris, he began his career as a marketing executive for the giant Philips of Eindhoven. He setup his own operation in the 1990s opportunistically installing networks in small French towns that had been excluded from the French cable programme. He sold that business to Kildare resident John Malone of Liberty Global. His second big adventure was Altice, which was built around 20 acquisitions of lagging cable, TV and mobile phones companies, often at knockdown prices. But the subsequent financial engineering and the essential cutting of costs was the telling aspect of how Mr Drahi made things hum.
Altice's primary market is France. Its subsidiary SFR is one of four players in the very competitive French market. The company was acquired by the Altice-controlled cable concern Numericable (previously France Telecom Cable) in 2014. Numericable controls the vast majority of the cable networks in France. Altice amalgamated both companies with its acquisition, Virgin Mobile. The new entity, renamed SFR, has 15,000 employees but plans to reduce them by one third, saving €400m.
Today SFR is the second largest bundle (pay TV, internet, and mobile) operator in France and contributes half of the group's profits. In 2016 it returned to revenue growth and profit margins were up. However, with the need for large investment the logic of consolidation remains. This will not be easy as over the years there have been many false starts at consolidation.
The US is the group's second priority market. It took its first step into the US in 2015 by purchasing 70pc of the St Louis-based cable company Suddenlink, followed by the acquisition of the New York cable company Cable Vision Systems now Optimum. As a result, Altice is the third-biggest cable operator in the US. Donald Trump's election should see less regulation so it is likely Altice would look for more deals. A listing of a stake of Altice USA would help development and is on the agenda.
The company's other assets have revenues of €4.3bn with PT Portugal, now known as Pharol, accounting for 2.3bn and Israel 0.9bn.
Because Altice is such a highly leveraged acquisition-driven company, it carries with it a high level of risk. A sharp change in corporate credit rates would have an impact on the company with its net debt of €50bn.
Revenue last year was €23.4bn but with little profits. However, in the last three years the share price has moved up from €6.8 per share to €21 today. The rewards are clearly there for potential investors who don't fear bitten-down finger nails. But it wouldn't be a share for the widows and orphans portfolio.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned