December 3, 2018

Breakingviews: Altice wins most from $2 bln fibre sale

by Breakingviews.

Patrick Drahi’s financial engineering makes Europe’s other telecom bosses seem idle. A 30 billion euro debt pile admittedly forces the founder and controlling shareholder of Altice to be creative. The tycoon has nonetheless come out top from his latest sale.

Altice on Friday said it had agreed to sell just under half of a unit that’s building fast-broadband lines in France to funds managed by insurers Allianz  and AXA and a Canadian pension manager for 1.8 billion euros. The unit will build connections reaching at least 1 million homes each year for the next four years, focusing on less populous regions of France.

Drahi is selling partly out of necessity. Without the infrastructure investors’ cash, he’d be unable to build the fast lines customers want and simultaneously reduce net debt, which at 30 billion euros is almost 13 times Altice’s market capitalisation. The cash proceeds at least make a small dent, reducing the company’s leverage to 5.3 times 2019 EBITDA from 5.6 times currently, according to Breakingviews calculations based on Refinitiv estimates. The cost is that Altice gives up its claim on half of the unit’s eventual cash flows.

Still, the good outweighs the bad. Low interest rates have created a thirst for infrastructure-like assets that generate steady cash flows. Drahi has seized on that to secure a premium valuation for an income stream that doesn’t exist yet. Assume the fibre unit builds its network as planned and that two in three homes take up the broadband service, implying 2.7 million customers in 2021. At a standard wholesale fee of 15 euros a month and an 80 percent margin estimated by Deutsche Bank analysts, the business would generate EBITDA of 384 million euros in that year. The sale values the unit’s equity at 3.6 billion euros. Add a planned 1.8 billion euro debt package, and the enterprise value is 14 times its 2021 EBITDA. That’s more than twice the multiple that Altice investors attach to its expected EBITDA for next year.

In the meantime, Drahi is offloading some of the risk that customers choose not to switch to faster fibre services, or that mobile-based 5G internet connections prove more popular than expected. Nor is he giving up control. For a financial engineer, even selling off a prized asset can be attractive if the price is right.

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