Altice International - Be careful what you wish for.
All,
Please find our updated model here.
We continue to see value in Altice International bonds, and despite the obvious tainting from related Altice entities, Altice International remains a performing credit. Management continue efforts to distinguish Altice International from its troubled sibling, Altice SFR, the reality is that the market is unwilling to treat them differently. The abandonment of the Altice Portugal sale is a credit positive. Some of the proceeds would have been used to pay down debt and maintain leverage at the 4.0-5.0x range, the excess equity cushion, which currently benefits creditors would have been dividended out of the Group. It is therefore in the interest of the creditors that the now contemplated infrastructure assets sale should also fail.
Investment Rationale:
- We maintain our 5% position in the sub bonds at 67%. The sub-bonds trade c.20% YTM, and despite the leverage creeping up, we remain confident the business will organically deleverage towards the end of the year.
- Additionally, early next year, following the merger and deconsolidation of Teads, the capital structure will further deleverage with the proceeds. There is some fear that the proceeds won’t be used for debt repayment, but the management was explicit in their comments. There is some doubt over the exact use, but we remain confident it will be used for debt repayment (split between Senior and Unsecured unclear).
- At current levels, c.60%, we see limited downside in the sub-bonds, but with the total mistrust between investors and Altice management, it is difficult to put any firm view on where the actual downside is. Asset coverage, in our view, is greater than the current debt levels.
- There is further upside if Altice International manages to sell some infrastructure assets in Portugal. The process to sell all of Altice Portugal has ended, but the company is seeking to divest some assets to raise further cash. We have mixed views on this, and although additional cash would be beneficial, leverage is likely to be maintained at 4-4.5x range, resulting in cash leakage out of the Group.
- Despite our concerns about asset sales and value leakage, we still see value in the capital structure, particularly the Unsecured bonds.
Recent Results Call:
As always, there are plusses and minuses in the Altice story. On the plus side, management was very clear that the proceeds from the Teads sale would be used for debt repayment when the transaction closes in Q125. In addition, the Company has restated its leverage target to 4-4.5x.
On the negative side, there is no cash coming from the sale of the BT stake. To be clarified in the accounts, the borrower has changed from Altice UK to Altice Group Luxembourg, the holding company for all European assets, including SFR. The loan is still pledged to the borrowers at Altice International and maturity is still October 2026, but realising the cash from this source has become less likely. Note that Altice International is 100% owned by Luxembourg, which provides little leverage for challenging such an upstream loan construction.
Asset Sales:
- The sales process for the Dominican Republic assets wrapped up earlier this summer, and management announced the cessation of the process to find a buyer for Altice Portugal. However, management was keen to highlight that although the Portuguese business as a whole was no longer for sale, there was still the potential to sell some other “high-value assets” within the Portuguese business.
- Management did not disclose what parts of the business would potentially be sold but alluded to some appetite seen during the Portuguese sales process for some of them. In the event of any infrastructure transaction in Portugal, proceeds would likely be split between debt repayment and dividend, maintaining the often cited 4-4.5x leverage ratio.
- It is for this reason, that we are cautious about any asset sales. Effectively the most valuable of assets will be sold, with the equity portion dividend out of the restricted group. Leverage will remain in the wider 4.0-5.0x range but with less equity cushion beneath the leverage level.
- As an example, if Altice International sells its Fast Fiber Portugal 50.1% stake, Morgan Stanley owns the other 49%), at double-digit multiples (they sold the 49% at c.20x multiple) then it is a significant dividend, even adjusting for the loss of Fast Fibre earnings.
Altice UK Loan:
- The Altice UK loan has been transferred to AGL (Altice Group Lux - the holding entity of Altice International). Altice UK was a direct subsidiary of Altice Group Lux. The loan has a maturity of end of 2026 and management does not expect the repayment of that loan in the short term.
- The loan is still pledged at the Altice International level to creditors. This is separate from the other shareholder loans from Altice International to Altice Group Lux.
- Theoretically, there is no value leakage with one obligor replaced by another. However, it is probably now further removed from the assets that supported the loan so we no longer include any recovery from this asset in our analysis.
Operationally:
- Despite some weakness in the numbers in Q2, the company has reiterated its FY24 guidance, expecting revenue and EBITDA growth year over year, resulting in positive free cash flow of 2850m Pro-forma for the sale of Teads.
- Altice Portugal saw 1.7% decline, driven by Altice Labs. Altice Labs is the R&D centre for Altice Portugal, servicing Altice USA, and SFR. With less fibre rollout, there is less procurement of equipment, declining the topline of Altice Labs.
- The Israeli business continues to see some decline, driven by the decision of the local regulator to phase out interconnection fees for mobile and fixed voice services from June 2023 and the lower roaming fees due to the lower tourism levels.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk