Altice needs a long-term strategy

Wednesday 22 November 2017 | 11:45 CET | Market Commentary
"Altice seeks to reassure investors, plans disposal of non-core assets", according to recent news. The headline begs some questions: what went wrong, why are investors worried and has Altice sufficiently addressed the issues? Investors seem worried about the French market and possible M&A in the US. However, investing in fibre in France underpins a sound long-term strategy and M&A should not be ruled out completely.

Altice's share price collapsed from over EUR 16 to under EUR 13 on 3 November 2017, after disappointing Q3 results. Rumors of directors and majority holder Next selling shares, as well as the resignation of CEO Michel Combes, pushed the share price to just above EUR 8 by 17 November. As a result, the market capitalisation halved in just a few weeks' time over poor results and a lack of confidence.

It remains to be seen what the lasting effect of Altice's reassurance of 20 November will be. In general, lost confidence isn't easily won back, especially at a highly leveraged company such as Altice.

Losing share in France

Results in France (SFR) have indeed been disappointing. The top four French operators booked revenue growth of 1.1 percent over Q3 2017 to EUR 9.83 billion. Iliad and Bouygues Telelcom are growing relatively fast, reporting EUR 1.25 billion (+5.3%) and EUR 1.29 billion (+6.7%) in revenues respectively. Orange's growth was more moderate at 0.2 percent to EUR 4.53 billion. SFR's performance slid to -1.6 percent in Q3 to revenues of EUR 2.76 billion (all units will be rebranded to Altice during 2018). This clearly tells us who is winning and who is losing on the French market, at the moment. SFR closed the ranks in terms of subscriber growth as well, and by some margin. With quarterly net additions of +7k in mobile and -75k in fixed, SFR has been losing share on both markets.

There is nothing wrong with M&A

Altice's reassurance to investors consisted of the following:

  • The company is not issuing new shares. Therefore, there are no acute financial problems and profits will not be diluted.
  • Majority shareholder Next has not sold shares, as suggested by a Bloomberg report. Managers selling shares was the result of older plans to do so and 'unforeseen life circumstances'.
  • The balance sheet will be deleveraged and there will be no meaningful M&A. Non-core assets in Europe will be sold, from H1 of 2018, including mobile towers.

Surely it is reassuring that managers are not abandoning ship and that there are no acute financial problems regarding existing debt. Altice's debt arose from earlier M&A, but there is nothing a priori wrong with doing M&A. When deals create value, when sub-scale activities are strengthened and when acquisitions contribute to EBITDA, M&A may be a sound strategy to build out a business and increase scale advantages.

Fibrer La France: sound investment

Recent rumors around Charter (US, for up to USD 200 billion) may be put to rest. However, Media Capital (Portugal) could prove a smart takeover if it would strengthen Portugal Telecom. Selling towers is an opportunistic and one-time intervention aimed at strengthening the balance sheet.

Other than that, the company should focus on consolidating the existing activities. Recent investment programs for fibre in France ('Fibrer La France') and Portugal underpin a long-term vision, which is what Altice needs most.

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