Wall Street is still infatuated with the possibility that Altice Group will drive bidding wars for cable companies following its startling agreement yesterday to buy 70% of No. 7 Suddenlink and its interest in Time Warner Cable. Shares in the No. 2 operator hit another new high this morning.
But some analysts warn that billionaire Patrick Drahi’s Luxembourg-based telecom holding company is punching above its weight. It’s taking on so much debt to buy Suddenlink that it may have to raise broadband prices, or cut customer services, especially if its optimistic growth assumptions don’t pan out. That may damage Altice’s efforts to negotiate additional deals or, if successful, to win support from regulators.
Altice execs say that they’re comfortable adding $1.2 billion in debt to Suddenlink’s $5.1 billion. They expect to see $215 million in synergies — cash-generating changes and savings including layoffs. They also talk about their interest in “consumption-based billing” for broadband, effectively putting a meter on subscribers who like to spend hours watching Netflix. Add the synergy number to the $905 million in cash flow that the cable company generated last year, and debt comes to 6.1 times the company’s cash flow. That’s high, but manageable, they say.
Others disagree. Altice’s proposed synergies amount to 27% of its costs not including programming and franchise fees, or $11 per subscriber per month, MoffettNathanson Research’s Craig Moffett calculates. It’s unrealistic to believe that it could save that much without upending the business. That’s why the combo “makes no sense.”
Moody’s Investors Service also fears that Suddenlink “may risk its market position if service quality deteriorates” it says in announcing that it’s reviewing the cable company’s already junk-rated debt for a possible downgrade. The St. Louis-based operation is “well-run” which means that “the opportunity to dramatically reduce operating expense may be difficult or result in operational disruption.” The one saving grace: Suddenlink’s many rural markets in states including Texas, West Virginia, Louisiana, Arkansas, and Arizona are “less competitive relative to the overall U.S. cable industry.” Translation: Many dissatisfied subscribers would be stuck.
Would these problems trouble the Justice Department and FCC enough to reject Altice as a possible acquirer of TWC? Probably not. Regulators objected to Comcast’s aborted $45 billion TWC merger because they believed the merger of the two largest cable companies would give it too much power over broadband. “All else equal, we think a smaller company post-merger would be preferable to the FCC and DOJ,” Guggenheim Partners’ Paul Gallant says.
But Altice’s financial limits, and the possible consumer harms, “will matter to TWC,” he adds. That could help John Malone-controlled Charter Communications if it and Altice engage in a bidding war for the company.