By Tim McElgunn
Sept. 17 — The move by Brussels-based telecom conglomerate Altice SA to acquire fifth-largest U.S. cable operator Cablevision Systems Corp. for $17.7 billion would accelerate Altice's expansion into the U.S. cable market even as it shrinks that market.
Altice announced in May that it would take a controlling stake in privately held Suddenlink Communications for $9.1 billion. The companies say they expect that deal to close in the fourth quarter. If both deals are consummated, the combined companies would serve about 3.7 million subscribers.
The Altice-Cablevision deal could still face regulatory opposition, however, as the Federal Communications Commission and the Department of Justice both have to sign off on it. The eventual combination of Cablevision and Suddenlink, currently the fifth- and seventh-largest U.S. cable companies respectively, probably would not raise regulatory alarms by itself. But regulators will be considering the deal against the backdrop of Charter Communications Inc.'s pursuit of Time Warner Cable Inc. and Bright House Networks. The two consolidation plays together would leave just four companies—Comcast Corp., Charter, Cox Communications and Altice—in control of more than 95 percent of the total U.S. cable subscriber base.
FCC chairman Tom Wheeler signaled that the agency would quickly review the Cablevision deal.
“So far as the policy issues concern, that’s something that we will take on in an open, fast process to be able to address them,” Wheeler told reporters Sept. 17.
Asked whether the commission would have a particular concern about a foreign company acquiring Cablevision, Wheeler said, “I think there are multiple things there. One is we will look at their various licenses and how the license transfers apply and how those rules relate to our existing rules and secondly, you should know, on all such matters there is a group called Team Telecom, which is kind of a multitude of agencies of the government that get involved in international affairs, national security and telecom policy.”
With no overlap between Cablevision and Suddenlink service territories, regulators are not likely to require Altice to divest any systems.
Cablevision investors, including the controlling Dolan family, will receive $34.90 a share in cash, or 22 percent more than the stock's last close in New York, Altice said Sept. 17. Based on the purchase price, Altice is paying $6,712 per video subscriber, taking into account the debt assumed. That compares with the $8,040 Altice has agreed to pay for each Suddenlink subscriber and the $7,138 Charter proposes to pay for each Time Warner Cable subscriber. The discount likely reflects the slower growth prospects in Cablevision's highly saturated markets.
Altice will finance the purchase with $14.5 billion of new and existing debt at Cablevision, cash on hand at Cablevision and $3.3 billion of cash from Altice. The debt portion includes $8.6 billion of new debt at Cablevision. Altice will raise the $3.3 billion cash portion of the purchase by selling new shares. BC Partners and CPP Investment Board have an option to buy as much as 30 percent of Cablevision, Altice said Sept. 17.
State regulators will also have to weigh in on the deal. One area of concern for them may be the amount of debt that Cablevision would take on. The New York Public Service Commission has raised debt as a concern in its review of Charter Communications' proposed acquisition of TWC — which, like Cablevision, has a large operation in that state.
Issuance of debt connected to Charter's proposed purchase of Time Warner Cable “represents the single most significant potential detriment” in the transaction, PSC staff said in a Sept. 16 comment.
According to the staff comment, “a high debt service could also serve to limit capital investment, both in terms of new products and expansion of existing markets and may result in a decline in general service quality since a company may have to seek cost cuts in these areas if it cannot otherwise service its debt.”
Spencer Godfrey, an analyst at KDP Investment Advisors Inc., told Bloomberg News that Cablevision will have to raise $8.6 billion through debt offerings, of which $2.5 billion will be used for refinancing and $6.1 billion will be incremental to existing debt. That pushes leverage to about 8 times earnings from about 4.6 times, an "enormous" increase, according to Godfrey.
And Altice will face challenges making the numbers work without significant cost cuts. According to a note from analyst firm MoffettNathanson, “A $900M [operating expense] synergy target implies that Altice can cut 30% (yes, 30%) out of Cablevision's non-programming costs.” And with no adjacent systems, combining Cablevision and Suddenlink's networks will not be an easy, or inexpensive, task.
While Cablevision is a well-run company that benefits from a geographically contained footprint across the New York City metropolitan area, the company has the highest penetration of any major U.S. cable operator, making subscriber growth difficult. The company has shifted its attention from its video business in recent years, calling itself a “connectivity company” and investing in improving its data service and building a regional Wi-Fi network.
But ongoing subscriber losses in its video business and minimal growth in data subscribers will make maintaining Cablevision's industry-leading average revenue per user (ARPU) difficult without raising prices. And with Verizon Communications Inc.’s FiOS network overlapping most of Cablevision's footprint, the company already faces among the highest levels of competition in the industry. Verizon has proved itself willing to wage a price war in the NYC metro market.
Even with Suddenlink and Cablevision in its stable, Altice will not have achieved sufficient scale to exert much leverage over programmers when compared to AT&T/DirecTV, Comcast, New Charter, and Dish Network. While Suddenlink has shown itself willing to drop popular channels—the operator did not renew its contract with Viacom in its last negotiating round—reducing programming while raising prices will likely lead to even faster subscriber erosion.
[With assistance from Lydia Beyoud in Washington.]
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