Altice - Short. Sohn Conference, Tel Aviv October 2015

Transcription

1 Altice - Short Sohn Conference, Tel Aviv October 2015

2 Disclaimer The following presentation represents ION s analysis and opinions, and is based on publicly available market information and regulatory filings by Altice. This is not an offer to buy or sell securities of Altice, nor should it be taken as advice on whether to purchase or sell securities of Altice. ION may have positions, short or long, in the companies discussed in this presentation. For further information, we encourage readers to review Altice s publicly available filings. 2

3 Boom and bust cycles history repeats itself Potash price per tonne, $ Africa-Israel share price, Source: Bloomberg History is replete with the remains of once high-flying industries and overleveraged companies 3

4 % change Altice overview - Altice is a Pay-TV/mobile operator in Europe, Israel, and most recently the US with net debt/ebitda of 5.7x Drahi sells 550mn in IPO Drahi sells 290mn Creation of dual class structure to fund M&A while protecting majority control Altice STOXX Europe 600 Telecommunications Source: Bloomberg Altice created 15bn worth of equity value in 21 months 4

5 EV/EBITDA multiple Telco M&A frenzy Altice has overpaid for its acquisitions 16.0x 14.0x 14.0x 12.0x 10.0x 10.1x 10.0x 8.0x 6.0x 5.9x 7.0x 6.9x 4.0x Sector 5 yr historical average SFR ('14) Portugal Telecom ('14) Suddenlink ('15) Bouygues ('15)* Cablevision ('15) Source: Bloomberg; Altice and Vivendi filings *offer rejected The sector s current EV/EBITDA multiple is 6.8x, up from 5.6x 5 years ago 5

6 Industry headwinds threaten traditional Pay-TV - 7.3% of US households have broadband but no pay-tv subscription, up from 4.2% in Rise of alternative OTT players - Broadband connection has become commoditized aka dumb pipe Altice valuations have soared as sector headwinds have accelerated 6

7 Implausible EBITDA margins - Altice claims that it has increased margins across its holdings Source: Altice Cablevision presentation We question whether HOT s real EBITDA margin has improved by 900bp 7

8 Israel: HOT s Hebrew disclosure reveals EBITDA margin 500bp below Altice s reported number Source: HOT 2Q15 financial statements Only 1/3 of the difference is explained by a management fee paid to Altice 8

9 Israel: We question HOT s aggressive accounting 12% 10% 8% 6% 4% 2% 0% % of content costs shifted from P&L to Balance Sheet 1% Altice acquired majority ownership 0% 6% 5% 10% Source: HOT financial statements Increasing capitalized expenses to inflate ebitda margins 9

10 Israel: Adjusted margins paint a different picture 50% 48% 46% 44% 42% 40% 38% 36% 48% Altice reported margin for HOT 2Q15 43% HOT reported margin 2Q15 Source: Altice 2Q15 financial statements; HOT 2Q15 financial statement; ION research based on Hot public filings When adjusted for capitalized content costs, margin improvement is negligible 41% Adjusted HOT margin 2Q15 10

11 Subscribers, k Israel: Cost-cutting went too deep Israel Pay-TV subscribers HOT (-6% CAGR) Yes (+2% CAGR) Source: HOT financial statements; Yes financial statements Analysts assign rich valuations to HOT (average 8.6x 2016 EBITDA) while incumbent Yes/Bezeq trades on 7.3x and is experiencing stronger commercial success Source: Bloomberg

12 Yield on 2022 Cablevision bond Cablevision: Does this deal mark the top? - Altice is paying a historically high multiple of 10x EBITDA for Cablevision - Unsecured bonds raised for the Cablevision deal were sold at over 10% yield, reflecting doubts around the company s ability to service its debt 12% 10% 8% 6% 4% 6% 10% New average cost of debt: 7.5% Leverage level: 7.4x pre synergies 2% Day before Altice acquisition Current Source: Bloomberg 12

13 $, bn Cablevision: Cost-cutting targets are unrealistic Non-content costs Non-content costs Implied 33% reduction in other operating costs 2 Source: Cablevision k; ION research - 1 Content costs Content costs e Increasing 7.5% per annum Management has articulated longer term cost reduction targets to the equity market which far exceed $450 million in savings promised to bondholders. Moody's views this more aggressive target as a longer term, aspirational goal Moody s, September 24,

14 EBITDA % Cablevision: We re skeptical of margin targets 50% 45% 40% 35% 30% 25% Cablevision margin unlikely to reach Altice target 32% 35% 48% Cablevision US Cable average Altice target for Cablevision Source: Altice Cablevision presentation Cablevision synergy targets of $900m appear lofty especially considering fiber competition, lack of mobile offering, and rising content costs 14

15 Wall Street overlooks the issues - Our 12-month ROIC-based price target of 41/shr incorporates a premium above our 30/shr valuation to capture Altice s M&A potential Goldman Sachs note on Altice, Sept 8, Given that the NAV is clearly growing, we place a 25% premium to NAV in determining our 38.00/share equity valuation. RBC Capital note on Altice, Sept 18, Adding 3.5bn for a 50% probability of a revived Bouygues deal and a further 4.7bn from additional M&A (based on our PE model) leading to a post-m&a Dec-16 TP of 28. JPMorgan note on Altice, Sept 1, Citi adds 2.5 of value for unknown future deals to Altice s price target in a Sum of the Parts Lucrative Wall Street fees ($200m for Cablevision alone) coincide with many sell-side analysts assigning lofty multiples and adding value for unknown future deals 15

16 10 questions for Altice management 1. How do you explain fully the discrepancy between HOT s reported 2Q15 43% EBITDA margin and your reported HOT margin of 48%? 2. Why has HOT been aggressively growing capitalized content costs while reducing expensed content costs? 3. Has Numericable shifted content costs from the P&L to the Balance Sheet? 4. When do you expect to reverse subscriber losses in Israel and France? 5. How much are content costs expected to rise at Cablevision over the next 3 years? 6. How can Cablevision without a mobile offering effectively compete against Verizon triple play? 7. Can you explain the difference in Cablevision cost-cutting guidance between equity holders and bond holders? 8. Why do you think that you can generate EBITDA margins in the US that far exceed those of any other US operator, including those with greater scale? 9. Why did you create a dual class structure despite the Expert Corporate Governance Service advising against it? 10. Your aggressive cost-cutting efforts in Israel resulted in a large number of customer losses due to poor service and you ve had to invest in restoring customer service levels (Altice 3Q14, 1Q15 earnings releases). Why do you believe that this creates long-term shareholder value? 16

17 Summary History is replete with sectors whose valuations reached disproportionate levels and then crashed. Every boom and bust cycle has a poster boy. In this cycle, it s Altice - We believe that Altice s operating track record is far less impressive than we re led to believe - We question management s ability to retain subscribers and whether they ve utilized aggressive accounting to inflate EBITDA margins - In our view, Altice has overpaid for Pay-TV acquisitions against the rising tide of OTT alternatives and cord cutting - On realistic multiples, we believe shares are worth ~50% below the current price 17