Altice International - Who gets what?
All,
Please find our updated model here.
The performance of Altice International bonds will be determined in two distinct areas - operational performance and structural considerations. Although there are likely to be increased competitive pressures in the Portuguese operations, we retain our view that the underlying business should remain stable. With the Company admitting that all parts of the business are currently up for sale, our thoughts are more focused on structural considerations and options available to the Company.
Investment Rationale:
- We maintained our 3% long position in the sub-bonds in Altice International we took in November at 73% over the summer and all the noise surrounding the "fraud" over the summer. We increased our position to 5% at 65% in mid-August, as we viewed Altice International as more "sinned against than sinning". Altice International may have overpaid for certain items but the numbers and cash that are recorded are a fair reflection of where the Company stands now.
- We return to our original thesis that International is the stronger of the two Altice entities, taking comfort from the fact that the underlying business provides deleveraging. The Finco (sub) bonds are relatively small in size versus the overall structure.
- Despite our relatively positive view, we are starting to taper our view. There remains ambiguity, not helped by the Company acknowledging there is some flexibility, in how proceeds of any sale would be applied. 100% of proceeds do not need to be used for debt repayment, and Altice International could dividend and/or use inter-company loans to support SFR Altice France.
Sources of funds:
- Based on our FY24 EBITDA assumptions, we value the combined business at 5.6x or €10.5bn net of pension liability.
- We aren't aggressive on valuations and acknowledge we have not included in our model any meaningful growth assumptions which would increase EBITDA going forward.
- However, also not included is the entry of Digi in the Portuguese market, which has the potential to impact Altice's market share and profitability.
-All of these are minor adjustments, compared to the impact on assumptions on what % of revenue CAPEX is appropriate for these businesses. For example, in Portugal in FY20 and FY21, Altice spent 23% of revenue on CAPEX, which has reduced down to the 16-17% range for FY23. We assume 17% for FY24 and FY25, dropping to 15% in FY26. Each 1 percentage point difference in CAPEX spending changes the estimated value by c. €450m.
Uses of funds?
- A simple question, but not one easily answered from the publicly available documents. Nor is it a question the Company are willing to answer.
- In our hypothetical scenario, we assume Altice International can sell their Portuguese operations for c. €5.6bn, net of pension liability.
Under scenario 1, we have used all the proceeds to pay down senior debt (and pension liability in Portugal), which reduced the Senior leverage to 2.7x, and overall leverage to 3.5x. Note: this excludes the asset Altice International has of the loan to Altice UK.
- Under this scenario, all is good, the business has deleveraged. But this does nothing for Drahi and provides no liquidity at Next BV.
- The alternative, Scenario 2, not all the proceeds are used to pay down debt, and potentially dividend some of the proceeds and/or lend to a holding Company for Next BV to obtain liquidity. We don't see any limitations on this, and under our scenario, we have generously only used €1bn to dividend up to Next BV. This leaves the rump of the business (Israel/Dominican Republic/TEADS) at 4.6x leverage.
- Note doing it as a loan to SFR/Next BV potentially would enable the distribution of liquidity and comply with the mandatory debt repayment under the loan documents (that is referred to in the last public bond documents).
Underlying Business:
- Underlying results reported were a non-event as the Company continue to grow both top-line and EBITDA as per guidance. With no major debt maturities before 2027 and net leverage likely to be below 4.5x at year-end, it is not surprising that the bonds found a bid, especially with management confirming the strategic review continues for its Portuguese, Dominican Republic and Teads assets, for which we expect an update at next reporting cycle.
- As always with the Altice structure, everything is not as it appears. Outside of management control, is the situation in Israel and the impact of the war. Management stated there had been no material impact on its infrastructure yet. What is in management’s control is its aggressive reporting of free cashflow which was reported as positive at c.€40m, but that is before cash outflow for reverse factoring of c.€60m and €30m from corporate costs.
- In addition, Altice International’s subsidiary Geodesia raises some questions. Geodesia is contracted for the majority of the fibre roll-out by a 50:50 JV with Vodafone. The JV is outside the restricted group. Related cashflow is excluded from Altice’s reporting metrics but revenue by Geodesia is recognised in the Business services in its Portuguese operations.
- Future results are likely to be impacted by the entrance of Digi into Portugal, who have acquired spectrum licenses in 2021 5G auction and are building out Fixed (FTTH) and mobile network (4G/5G) with an expected launch in 2024. This may impact valuations but we feel comfortable with our conservative estimates above.
With yields remaining above 10%, and our conservative valuations, we are maintaining our position. But as the yields continue to tighten we are likely to reassess our position.
Happy to discuss this.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk