Altice France - Déjà-vu
All,
Please find our updated model here.
A significant number of press articles have focused on the Portuguese investigation and options available to Drahi/Altice France to reduce its debt burden. However, we refer to earlier emails on the subject and highlight the bigger issue facing Altice France is its underlying performance. Any potential investor in the Altice France structure needs to take a view on the timing and magnitude of the promised reduction in CAPEX and therefore the pace of deleveraging likely over the coming years.
We don’t want to mention another French over-leveraged Company in comparison, but Altice appears to have similarities - over-leveraged with a sprawling set of operating assets, and crucially an underperforming core business. Drahi/Altice has some options and needs to get out in front of the problem, but unless some certainty can be brought to the core business, we don’t see the Company hurriedly executing these options.
Investment Considerations:
- We continue to weigh up our options on how best to be involved in the Altice France structure. As outlined below, Drahi/Company have some options available to them, but our underlying reluctance is centred on the underperforming operations. The perennial issue with Telecom companies is the view that CAPEX will reduce in the coming years - one last push to roll out the new technology which will be followed by high cash conversion thereafter. Altice France is no different with CAPEX expecting to reduce in the coming years post roll out of the fibre network.
- The senior notes in Altice France yield 11-12% range excluding the two short-dated (Q12025) bonds. Even on the most optimistic outlook, leverage at this entity is not going to be below 4.0x, which would imply a yield of c.10%, providing very little upside from current levels. With the quantity of senior debt (c.€20bn), we don’t envisage the Company doing substantial debt purchases at this level coupled with the fact that there is likely to be limited interest savings for Altice in purchasing these Senior bonds with relatively low coupons.
- An argument can be made for the Company to purchase some of the Altice France Holdings (subs) bonds which trade c.40-50% of face. If Drahi feels the need to provide new equity into the structure, he is most likely to purchase the sub-bonds, capturing the biggest discount.
- However, although we expect the Data centres to be sold in the coming months, we don’t see Drahi interfering with the capital structure in the short term. Drahi/Altice have some time (albeit it is never as much as you think) and are likely to keep their powder dry in the coming months. In the meantime, the market will focus on the underlying business and its struggles.
- Considering all of the points raised above, we are considering a pairs trade, long the sub bonds and short the senior bonds. We will further explore this and other options in the coming days.
More sinned against than sinning?
- As the investigation continues it appears that Altice France (and Altice International) is more sinned against than sinning. More than a month after the investigation became public, Altice France has yet to find any significant breaches or fraud, with Altice France taking a full review of all its procurement practices.
- The Portuguese investigation has focused on c.100 suppliers, of which it appears Altice still has contracts with c.10 of these. The vast majority have already been terminated, with those that remain providing labour to the Group.
Underlying Operations remain challenging.
- While most of the press articles focus on the Portuguese investigation and potential levers Drahi may pull to deleverage, Altice France operationally continues to disappoint. Residential services and Business services, the two main Revenue lines, both show declines, at c.2.5% each. Residential has seen a decline in both fixed and mobile, with modest declines in customer numbers. Management reiterated their previous comments (and comments from other operators) that the outlook for H2 23 was stronger on the revenue side, with ARPU rising over the last couple of months.
- Business services declined due to the decline in construction revenue as a result of the slowdown of rollout by XpFibre.
- The lower revenue translates into lower EBITDA, as higher energy costs and lower contribution from construction, result in EBITDA declining by c. 5.5%.
- Cashflow remained negative for the quarter, albeit a minor €23m outflow in Q2 versus €234m outflow in Q1. This is after a c. €350m working capital outflow for H1. We are awaiting the full disclosure of accounts and disclosures to evaluate Q2 numbers, but the initial take is they remain disappointing.
- Altice France continues to promise better times ahead but the reality this can’t be proven by current numbers.
- Exceptional items include €100m outflow for Altice TV (outside the restricted group), €140m outflow in restructuring costs, outflow due to the Coriolis acquisition and the spectrum costs. All of these, for various reasons, are expected to reduce to zero in the coming years.
Options available to Altice France, but more importantly probability of execution?
- Option 1: Sale of data centres
- This has been underway for a long period and some banks and investors were given the nod it was likely to be complete before the release of Q2 numbers. The CFO, Malo Corbin, admitted that the process has been delayed due to the Portuguese investigation, but management remains confident a deal can be completed. Although Altice France has not disclosed any valuation, the CFO did state that valuations under negotiations have not changed. Various press reports indicate c.€1bn of proceeds for the French data centres. We expect this deal to be concluded before the investor meetings in September.
- Option 2: Equity injection
- Any equity injection could come in the form of a strategic investor and/or additional equity from Drahi.
- We assign a low probability of an equity raise from outside money, with leverage at current levels and more importantly, the underlying business yet to reach the inflection point. We don’t see Drahi diluting himself at this moment, given he still has other options available.
- On Drahi investing himself, it is an option but we caution on assigning a high probability to this. There are no significant upcoming maturities that could trigger a default and there are no compelling reasons for Drahi to inject fresh equity at this stage. Unless for Option 3.
- Option 3: Distressed tender/buybacks
- Drahi was at pains to remind investors of the Numericable investment playbook where the business sold assets and brought in cash to buy back debt at a cheaper price. Drahi is quoted “And we are going to do the same thing again”. There was a word of caution from other members of the management team, who highlighted that €500m of bank debt and €1,000m of bonds fall due in 2025. There is a limited discount to capture with these near-term bonds and we would suspect management will prioritise the repayment of these maturities before partaking in a distressed tender of longer-dated bonds.
Option 4: XpFibre
- The perceived wisdom is that XpFibre will be fully consolidated into Altice France accounts in 2025/2026 when XpFibre becomes FCF positive. At this point, CAPEX will have reduced substantially and by exercising its option Altice France can increase its stake from 50.01% by a couple of percentage points.
- We highlight that current leverage is c. 8.0x although leverage should reduce to c. 4.0x by FY25/FY26. Consolidating XpFibre will have a marginal impact on deleveraging the combined group, but with a large minority investor, we are not convinced investors will treat it as a step change deleveraging.
- Other options are available concerning XpFibre. Altice France may seek to sell a further stake in XpFibre, and/or refinance it to pay a dividend up to Altice France. We would argue investors are discounting the possibility of alternatives and are focusing too much on the consolidation of XpFire.
Conclusion - All of these options, and perhaps more, are currently in progress. Management confirmed that advisers and processes are in place for all of these options, with management indicating they intend to provide further information on these during the Q3 call. We suspect there is a possibility that the data centres would be sold before then, but we suspect all other options are FY24+ timeframe.
Other wrinkles - who owns what?
- On the Altice International call, Patrick Drahi revealed that Armando Pereira, currently under investigation by the Portuguese authorities for alleged corruption, holds no direct stake in Altice nor the Next holding Company. Periera had invested in the first acquisition of Altice, and over time, his economic interest has changed. A direct quote from the call has Drahi stating - since ’05 he (Pereira) has not owned a single share or right in any of the Altice entities but simply maintained a carried interest of around 20% of my personal economic interest”.
- This appears either very generous or that Drahi is not the 100% beneficial owner of Next. Or there are significant borrowings at Next. We were frantically pressing *1 on our telephones but we were unable to ask the call. We have a question into Altice but don’t hold out much hope of it being answered.
Next Steps:
-The fact that Drahi felt the need to join both calls and his conciliatory and complimentary tone to credit investors highlights the reality of the situation - Altice is over-leveraged and requires support from both creditors and Drahi himself. But the timing for creditors to provide support is not now. Drahi/Altice France has some options available to them, and we suspect that the promised roadshow in September will be accompanied by announcements of asset sales.
- Drahi/Altice France has promised to disclose further information to investors on the various options outlined above on their Q3 conference call. These options are likely to form the basis of the investor meetings in September.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk