Tear Sheet: Altice NV Short-Term Deleveraging Reliant on Towers, DR Disposals, Spinoff Proceeds; Medium-Term Strategy Hinges on Strong FCF Generation Potential, Improving KPIs at SFR  

Relevant Item:
Altice Tear Sheet & Financials (Reorg Analysis Page)

Altice is aiming to sell a minority stake in its French tower portfolio and dispose of its Portuguese tower assets and Dominican Republic unit in the second quarter of 2018 as a part of the company’s deleveraging strategy. Reorg has calculated that pro forma consolidated leverage including the €900 million from the Altice US spinoff proceeds is 4.8x compared with 5.5x as of third quarter. The French business is projected to return to cash generation in 2019 because once the restructuring costs are taken out, the free cash flow potential of SFR is roughly €900 million. Management said it believes that the restructuring charges will be fully phased out by the second quarter.

The telecommunication group is targeting €4 billion to €4.5 billion in proceeds from asset sales, which will be distributed across the company’s capital structure, as reported. The company will further benefit from €900 million in proceeds from the spinoff of Altice US, which will be used to pay off its corporate financing facility.

Altice SFR’s towers will be grouped in a new company whose 49% is going to be sold to a sponsor for projected €1.5 billion. Some private equity groups have already expressed an interest in the assets, according to sources. Meanwhile, Cellnex is rumored to have already put forward a €600 million bid for Altice’s 3,000 Portuguese towers, according to a Bloomberg article. The company said it aims to make about €2 billion to €2.5 billion from the Altice Dominican Republic strategic review and added it is in talks with multiple private equity buyers.

The recent underperformance of its French division SFR has sparked negative sentiment on Altice. The company is focusing on its deleveraging process (outlined below) as well as on improving the soft KPI performance and reduce churn in its highly competitive market.
 
Altice Europe

Altice Europe is a convergent multinational cable and telecommunications company. The company conducts its activities in France through Numericable/SFR and in Western Europe and overseas territories through Altice International. The Western European geographies comprise Belgium, Israel, Luxembourg and Portugal, while the overseas territories comprise the Dominican Republic and certain French overseas territories in the Caribbean and Indian Ocean regions.

On Jan. 8, the company’s board of directors approved and announced plans for the separation of Altice USA Inc. from Altice NV, which is then to become Altice Europe. Altice NV aims to complete the proposed transaction by the end of the second quarter this year following regulatory and Altice NV shareholder approvals in accordance with the timeline below.
 
Shareholders of Altice NV are to receive 0.4163 Altice USA A shares or B shares per share of Altice NV with B shares to represent up to a maximum of 50% of the shares in Altice USA. Altice USA B shares will remain unlisted and convertible into listed Altice USA A shares at shareholders’ request. All other rights will be the same between the classes. Post-separation, Patrick Drahi will serve as president of the board of Altice Europe and chairman of the board of Altice USA.

Simultaneously, the board of Altice USA approved in principle the payment of a $1.5 billion cash dividend to all shareholders immediately prior to completion of the separation. The payment of the dividend will be funded with available Optimum revolving facility capacity and a new financing at Optimum, at Altice USA level. Altice NV will use €625 million of its €900 million of proceeds received in the Altice USA dividend to prepay a portion of the Altice corporate financing facility and will retain €275 million on balance sheet. In addition, the board of directors of Altice USA has authorized a share repurchase program of $2 billon, effective following completion of the separation at Altice US.

Moreover, Altice Europe will reorganize its structure comprising Altice France, Altice International and a newly formed Altice Pay TV subsidiary.

The resulting corporate structure of the business is as follows:
 
Altice Europe supported the following capital structure as of the third quarter of 2017:
 
The consolidated business generated €5.883 billion in EBITDA before deal fees and restructuring items as of the third quarter of 2017. This translated into 38% EBITDA margin on the LTM revenue of €15.491 billion. Historically, the EBITDA margin of the Altice Europe business fluctuated between the high of 40.3% in 2013 and low of 37.7% in 2015. However, the restructuring items Altice Europe incurred driven by its acquisition and reorganization streak compressed the margin further. As a result, the margin swung between 33.2% in the last twelve months as of the third quarter of 2017, on the back of considerable €750.7 million restructuring charge, and highs of 37.1% in 2016.
 
Net leverage of the company was 5.8x using EBITDA before restructuring fees and 6.6x after. Using only bank loans and notes to calculate debt and leverage, leverage declines to 5.4x and 6.2x, respectively indicating 0.4 turns of other financial liabilities on the balance sheet.

The maturities of Altice France and Altice International are below:
   
However, as a result of the U.S. operations spinoff, the company will raise €900 million in proceeds, of which €625 million for deleveraging by paying off its corporate financing facility. Following the transaction, net leverage will decline to 5.6x of all financial liabilities on the balance sheet inclusive or 5.2x using only loans and notes.

Furthermore, the company is looking to raise cash through disposals of the tower portfolio and Dominican Republic assets. The minority stake sale in the tower portfolio is projected to fetch €2 billion between France and Portugal, which would bring down leverage by a further 0.3 turns, while the Dominican Republic assets could bring in a further €2 billion to €2.5 billion for an asset, bringing in €367.4 million in EBITDA. We discuss the effects on respective debt silos and business below. The consolidated leverage would decline to 5.2x on a pro forma basis following disposals of the towers, the Dominican Republic asset and the €900 million proceeds from the Altice US spinoff. Using merely the notes and loans, the pro forma leverage stands at 4.8x.

Funds from operations, or FFO, which is cash from operations before working capital changes, reached €2.311 billion in the last twelve months, overshadowed by the €4.245 billion capital expenditure and acquisitions charge. This was partially offset by €627.6 million working capital release and €370.2 million in disposals.
 
The company has historically generated positive EBITDA less capital expenditures and interest at roughly 3% margin on average over the last three years. In the last twelve months, Altice Luxembourg generated €288.9 million in EBITDA after capital expenditures and interest in particular. However, taking into account further spend of €553.9 million on acquisitions, tax spend, restructuring expenses and others, the company burns cash. Moreover, capital expenditure has grown significantly without a major corresponding increase in the top line of the company over the last two years. Below, we analyze Altice Europe and Altice International separately.
Altice SFR

SFR is a French telecommunications company that provides voice, video, data, internet telecommunications and professional services to consumers and institutions. The telco is the second-biggest player in the French market with 14.6 million mobile customers and 6.1 million fixed customers on its B2C platform, 5.7 million customers on its mobile B2B platform and 317.6 wholesale fiber customers. Across the company’s mobile platform, the company has 20.2 million customers, which compares with Orange’s 31.2 million as of the second quarter of 2017.
   
Created as a result of the merger of Numericable and SFR, Numericable-SFR aims to become, on the back of the largest fiber optic network and a leading mobile network, the national leader in France in the convergence of very-high-speed fixed-line and mobile.

In the B2C segment, the group operates under the Numericable, SFR, Red and Virgin Mobile brands. In the B2B segment, it operates under the SFR Business Team, Completel and Telindus brands.

The French arm of Altice Europe struggled with its KPIs despite its state of the art coverage and infrastructure on the back of long service periods. The market in France is highly saturated and competitive and as such, to preserve revenue and customer base, the company is under pressure to constantly invest in the newest technology. While the free cash flow generation of the business in the short run is strong as we lay out below, Altice SFR will have to focus on reducing churn in the long run.

LTM revenue of the company as of third quarter of 2017 amounted to €11.121 billion, 1.2% growth from the year-end 2016 figure of €10.991 billion. However, on a conference call on Jan. 8, the company guided 7% revenue decline in the fourth quarter of 2017, which translates into a flat year from the sales perspective. The two consecutive years of stagnating revenue in 2016 and 2017 followed 408.7% top-line expansion in 2015 as Drahi’s Numericable had bought SFR from Vivendi in 2014.

In the last twelve months, Altice France generated EBITDA before restructuring costs of €3.723 billion at 33.5% margin, up from 32.3% in 2014 though below the 34.5% and 34.8% achieved in 2015 and 2016, respectively. Moreover, the company experienced further drag on its profitability driven by restructuring charge of €1.177 billion in the period. The charge resulted from restructuring aimed at improving profitability and realizing synergies post acquisition. This resulted in EBITDA after restructuring items of €2.546 billion at 22.9% margin, 10 points below the past three years. The impact of the charges was partially offset by working capital release amounting to €525 million and suppressed acquisition spending, which stood at €152 million, shadowed by €736 million in 2016 and €13.206 billion in 2015. Nevertheless, the free cash flow was negative €336 million despite this.

Ignoring the restructuring charges, the free cash flow would have been positive €841 million. Management stated that it believes that the restructuring charges will be fully phased out by the second quarter of 2018, resulting in a highly cash flow generative entity.

Net leverage of the company using all financial liabilities on the balance sheet stood at 4.8x using EBITDA before restructuring items, or 7.1x restructuring items inclusive. Altice SFR is also looking to sell a minority stake in its towers portfolio projected to fetch €1.5 billion, which would reduce leverage by 0.4 turns. Given the high cash flow generative potential of the business once the restructuring costs are phased out, the company has a lot levers to pull to deleverage, focus on improving its lagging KPIs and preserve its position in the highly competitive market and generate value.

B2C Segment

The group is the second leading operator of mobile telephony in France by number of subscribers, with 14.6 million B2C customers as of second quarter of 2017, down 14.6% from 2013 in a highly competitive market. This compares with Orange, the market leader with 21.8 million SFR, as one of the primary convergent operators in France, offers an attractive “quadruple play,” which is based on innovation and supported by competitive fixed and mobile networks, in order to meet the increased demand for high-speed connections and bandwidth.
       
B2B Segment

In the B2B segment, the combination of the Completel and SFR Business Team brands has formed the most important alternative operator in France vis-a-vis the incumbent operator. The group benefits from solid relations with its large corporate customers and with entities of the public sector, and has the ability to respond to the growing demand of SMEs for increasingly sophisticated voice and data services.

The group offers data services, including IP VPN services, LAN to LAN, Internet, security services, hosting and “cloud computing,” mobile telephony services and voice services, in particular voice call services, VoIP and Centrex.
Wholesale Segment

In the wholesale segment, the company offers wholesale connectivity services for fixed-line and mobile voice calls, wholesale connectivity services for data, wholesale fiber infrastructure services as well as white label triple play DSL and Very-High-Speed offers. The group offers a broad portfolio of products with a significant base of national and international operators.
COGS

Altice SFR incurs cost of sales comprising purchases of goods, interconnection costs, network operating and maintenance costs, as well as the share of related personnel expenses and taxes and duties. Purchases of goods include handset purchases, commercial and distribution costs include customer acquisition and retention costs, except for the cost of subsidizing handsets, which is deducted from revenue, and also include distributor compensation, customer service, and advertising and marketing costs.

SG&A

Selling, general and administrative expenses primarily include IT costs, committed costs and taxes unconnected with the cost of sales.

Altice International

Altice operates high-speed cable, fiber or DSL-based fixed-line networks in all its operating segments. The company also operates 4G/LTE and 3G networks in Portugal, Israel and Dominican Republic, as well as in its businesses in the French overseas territories, which are included in the other segment pursuant to the group’s convergent strategy.

In Portugal, Altice owns PT Portugal, the largest telecom operator in Portugal that caters to fixed and mobile B2C, B2B and wholesale clients using the Meo brand. In Israel, Altice provides fixed and mobile services through HOT and HOT Mobile brands to B2C, B2B clients. HOT also produces award winning exclusive content that it distributes using its fixed network. The last major geographic segment is Dominican Republic, where the company provides fixed and mobile services to B2C, B2B and wholesale clients using the Tricom (cable network) and Orange (under license) brands. The other segment includes the operations in the French overseas territories, Belgium, Luxembourg, and Switzerland, as well as the content, technical service and customer service business, and all corporate entities. Management said it believes that these operations are not substantial enough to require a separate reporting segment.

Altice International delivered LTM revenue of €5.252 billion, up 16.3% from 2016 on the back of the growth in its “other” businesses. EBITDA in the period was €2.323 billion at 43.3% margin, down 3 points from 2016 as gross profit margin was squeezed. Funds from operations declined to €963.2 million in the last twelve months from €1.129 billion at the of 2016 driven by higher interest. Following the working capital buildup of €61.8 million, the cash flow from operations was €901.4 million, which compares with €1.120 billion in capital expenditure resulting in cash burn.

The company is planning to dispose of towers from its Portuguese business with Cellnex eyeing the asset. Projected proceeds are roughly €600 million, which would result in a 0.2 turn decline in net leverage. The company is further looking at offloading the Dominican Republic segment for €2 billion to €2.5 billion. As a result, the pro forma leverage following both the disposal of the towers and Dominican Republic would be 3.6x times assuming proceeds of €2.5 billion for the Dominican Republic assets and EBITDA of €367.4 million. In case of the disposal fetching the low end of projections, the pro forma LTM leverage would be 3.8x.

Pay TV

During the year, Altice secured exclusive content rights to broadcast English Premier League Football, Champions League, French Basketball League and English Rugby Premiership in France and other territories by SFR. The rights are for periods of between three and six years. The company sells the service through OTT channels and wholesale agreements and is looking to enter into distribution with other providers on the market.

As a part of the 2018 corporate structure reshuffling, spinoff and divestment, the company separated its content business into a separate vehicle Altice Pay TV and created a new debt silo to finance the entity. The EBITDA of the business was roughly negative €200 million. The rough price for the rights to distribute the content are roughly €100 million. Therefore, if a deal is struck with a provider such as Orange that is “open minded,” the company could close this negative EBITDA gap in the future.
 
Mobile Competition

Orange is the incumbent telecommunications operator in France and one of the world’s largest telecommunications operators. In France, it offers a complete range of services on the B2C and B2B segments and the wholesale market and has large market shares in all these segments. It provides services on a national level, using its copper local loops, backbone and infrastructures as well as a vast mobile network. As of January, the main shareholder of Orange was the French government, which held approximately 13.4% of its equity capital.

Iliad, which conducts business under the trade name Free, is a telecommunications operator that has been very active in France since the late 1990s. It is known for having introduced new commercial offers onto the market at reduced prices, thereby bringing about important changes and high levels of competition on the French market. For example, in 2002, it launched a DSL offer at €29.99 per month, to which fixed-line telephone and television services were added in 2003. Competitors then followed suit, bringing about a generalization of triple play offers at €30 until 2011 inclusive. Free obtained the fourth mobile telephony license in 2009 and launched a mobile telephony offer in January 2012 with a mobile flat fee of €19.99 per month, reduced to €15.99 per month for its DSL subscribers, which includes unlimited calls, SMS, MMS and mobile internet access inclusive, without subsidized telephone and without commitment. This offer transformed the mobile market.

Free had 10 million mobile customers as of Dec. 31, 2014, and a market share of around 15%, three years after its commercial launch (source: Iliad press release). In December 2013, Free launched its 4G offers at the same price as its 3G offers, thereby elbowing out the 4G offers of other operators that charged a premium on 4G. Free operates exclusively in the B2C market.

Bouygues Telecom is held by the Bouygues SA conglomerate. It has been present in mobile telephony services since 1996 and in fixed-line telephony services since 2008. Its DSL offer is based both on unbundling and on white label contracts with the group. In the French mobile market, Bouygues Telecom had 11.1 million customers and a 14.4% share of the mobile fleet at end-2014, down 0.6 points at end-2013. Bouygues Telecom is also active in the B2B segment. It makes particularly competitive offers to professional customers and also works in partnership with other companies to develop innovative telecommunications solutions.

Altice SFR History

The group’s origins date back to the creation of the cable networks in France. Part of the group’s cable network was built under the cable plan in the 1980s by the French government, before being transferred to Orange, the incumbent telecommunications operator. Another part of the group’s network was built under the new deal plan, a set of regulatory rules that allowed local authorities to set up their own networks or to have networks built by private companies. These private companies were then granted concessions to operate the networks for 20 to 30 years.

Market consolidation began in 2003 when the limit on the number of homes connected to a single cable operator was abolished. Altice One, a subsidiary of Altice, acquired Est-Videocommunication in December 2002, and Coditel Belgium and Coditel Luxembourg in November 2003. In March 2005, Ypso, an entity controlled by the investment funds Altice and Cinven, acquired the cable businesses of France Telecom Cable, TDF Cable and NC Numericable, making Ypso the largest French cable operator. In 2006, Ypso acquired Est-Videocommunication, Coditel Belgium and Coditel Luxembourg from Altice One, as well as the cable business of Noos-UPC France from UBC Holding BV, making Ypso the sole cable operator with a significant presence in mainland France. In 2006, Ypso started deploying optical fiber on its network. In 2007, all of Ypso’s cable businesses were united under a single brand, Numericable.

In September 2007, two of Ypso’s shareholders, Altice and Cinven, acquired Completel. This allowed the group to acquire DSL and fiber metropolitan area networks, a corporate segment and a nationwide backbone.

In March 2008, Carlyle acquired a 38% stake in Ypso and Completel. In 2008, the group also established Sequalum to design, finance, market, deploy and operate an FTTH ultra-high-speed fiber network in the Hauts-de-Seine area. By the end of 2008, the group had fully integrated the historical Numericable business with the historical Completel business; since then, the legacy networks have been operated as a single network, providing residential, corporate and wholesale services to the group’s customers.

In addition, the group has improved and extended its B2B operations through the acquisitions of B3G, a French leader in IP Centrex, in 2009 and Altitude Telecom, a major French player in IP VPN, in 2010. In 2011, the group focused on developing a new and innovative "box" that would allow it to make the most of its fiber network. In May 2012, the group began marketing “LaBox,” an integrated set-top box and cable router that it offers to its triple play and quadruple play customers. The group believes that LaBox is one of the most powerful and interactive set-top boxes on the French market. See section 6.5.1.2 B2C segment offers of this registration document.

In February and October 2012, Numericable Finance & Co. SCA, an independent special-purpose vehicle, issued high-yield bonds in the amounts of €360 million and €500 million, respectively. The success of these two issues allowed the group to restructure 58 Numericable’s debt, minimizing liquidity risk and ensuring the continuity of the group’s investments in the residential segment. In March 2013, the group acquired Auchan’s television, ultra-high-speed broadband and fixed telephony services, which had some 5,000 individual subscribers. In June 2013, the group acquired Valvision, a simplified joint stock company governed by French law that was a small regional cable operator in France with about 5,000 individual subscribers and 8,000 bulk subscribers.

In October 2013, the group, through Altice B2B France SAS, acquired LTI Telecom SA. In November 2013, Numericable group completed its initial public offering. Since then its shares have been listed on Euronext Paris. The group simultaneously reorganized and streamlined some of its legal entities. First, following the transfer operations, Numericable group became the ultimate parent, controlling the entire capital of the parent companies of the “Numericable” and “Completel” sub-groups.

On Nov. 27, 2014, the company acquired 100% of SFR’s capital, as well as the entirety of the shares of another of Vivendi’s subsidiaries, SIG 50. As part of this transaction, (i) on Nov. 27, 2014, the company paid Vivendi a cash price of €13.17 billion less debt and cash, or a total of €8.54 billion; (ii) the company acquired Vivendi’s current account in SFR, at a price corresponding to the amount in principal at the transaction date, including all interest accrued as at that date, or €4.83 billion, less €0.2 billion reimbursed by Vivendi for its contribution towards financing the acquisition of Virgin Mobile, and (iii) Vivendi transferred some of its SFR shares to the company in consideration for 97,387,845 newly issued shares in the company representing 20% of its capital (the “Transfer”), such Transfer having been approved by the extraordinary shareholders’ meeting on Nov. 27, 2014. The SFR acquisition was authorized on Oct. 27, 2014, by the French Competition Authority.

The group combines the national interurban fiber infrastructure of SFR, which includes nearly 50,000 kilometers of optical fiber lines, and more than 160 MANs, as well as 80 MANs of Numericable group, which thus constitutes a dense and complete fiber infrastructure in France. Following the consolidation of SFR and Virgin Mobile that is under way, the group will benefit from network and operational synergies, as well as other synergies, which should allow it to reallocate investment expenses in order to accelerate its investments in rolling out the fiber network and thus to support innovation in terms of products and services to better respond to the growing demand for very-high-speed and next-generation services.