Summary
The actions of Altice USA and its controlling shareholder are not consistent with a company that plans to operate on a standalone basis.
ATUS is faced with the challenge of holding onto their customers even though they lack the balance sheet to enter the fray for additional assets.
A potential deal value for ATUS is closer is to $17-32 per share, by my estimate.
Separation from Altice N.V. Another Sign Company May Be Headed for Outright Sale
Patrick Drahi, the controlling shareholder of Altice N.V. and Altice USA, Inc. (NYSE:ATUS) has now separated his cable empire into two pieces. But why? I doubt Mr. Drahi pays investment bankers because he enjoys their company. The most logical conclusion is he is preparing his U.S. business for outright sale.
The communications services market, encompassing the provision of video, internet, and voice services is rapidly changing as more video is consumed over the Internet. Communications providers like AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) are aggressively acquiring content to fill their pipes in an effort to defend their video franchises and diversify away from being a pure infrastructure provider.
The advent of 5G wireless networks (and eventually 6G, etc.) will create another new dynamic in communications markets — dense fiber networks. Once 5G wireless networks are fully built out by the middle to latter part of the 2020s, wireless companies increasingly will be in a position to compete with traditional wireline providers of Internet service. In the longer run, I expect two or (more likely) three national broadband providers. The largest wireless players (Verizon (NYSE:VZ), T, T-Mobile (NASDAQ:TMUS)/Sprint (NYSE:S)) are likely to be in the best position to consolidate the wireline industry given a preexisting nationwide footprint.
ATUS is faced with the challenge of holding onto their customers even though they lack the balance sheet to enter the fray for additional distribution assets, much less the content assets their larger peers are gobbling up. ATUS primarily must defend its 51% Internet service market share if it is to survive. Rather than adopt DOCSIS 3.1, ATUS has decided to skip that step and deploy fiber-to-the-home across the 8.6 million homes in its footprint.
This is a curious tactic for a standalone company. ATUS is blessed with relatively dense markets and is able to run a lot of aerial fiber, but most cable providers have concluded it is better to defer upgrading to fiber as long as possible from a cash flow perspective. However, if you are dressing the company for sale, a shiny new all-fiber network might be an appealing asset for an acquirer.
The company’s lack of concern with its financial leverage is equally strange for a standalone company. As part of the separation, ATUS has taken on another $1.5B helping of debt. This brings the company’s debt to EBITDA ratio to more than 5.5x. The company aims to bring that down to 4.5 to 5x by the end of year, even including the impact of potential share repurchases. Targeting a 4.5-5x debt to EBITDA may not be prudent with a stable marketplace for the company’s services. It is clearly dangerous for a company whose industry is being turned on its head. But again, if you are selling the company, the risk of financial distress likely disappears once a deal is announced.
ATUS has considerable upside if a sale takes place
Based upon my operating and valuation model (visit my marketplace service, Better Retirement Investing, for a copy), I estimate that ATUS is worth $10-22 per share on a standalone basis. Yes, you can navigate an aircraft carrier through that range, but such is life when you potentially are at risk of losing a significant part of your customer base due to a rapidly changing world. The lower end of the range assumes ATUS serves one-third of its footprint with Internet service, while the high-end of the range assumes they hold their current share of approximately 51%.
But this isn’t being run like a standalone company. And the synergies with an acquirer would be substantial. The marketing and administrative expenses of cable companies are generally in the mid-teens as a percentage of total revenue. If a buyer can eliminate half of those costs, the value of the synergies could range from $7-10 per share. So a potential deal value for ATUS is closer is to $17-32 per share, by my estimate.
Given the current share price, the stock appears to be a reasonable speculation for investors that see consolidation of smaller cable and telecom providers as inevitable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article