2023-03-06 16:19:09 ET
Summary
- ATUS stock has risen 9.7% since rumors of takeover interest from Comcast. We do not believe a deal will happen.
- With its $26bn+ current Enterprise Value, ATUS may be too large to acquire, and any deal will push Comcast leverage above target.
- ATUS has deep problems that are difficult to fix, and synergies would be limited by differences in technology and wireless arrangements.
- A new team has just started, the controlling shareholder is not motivated to sell and ATUS had already failed to sell part of itself in 2022.
- We reiterate our Holding rating on ATUS. Avoid.
Introduction
Altice USA ( ATUS ) stock has risen 9.7% since last Tuesday (Feb. 28) when media reports started to speculate about potential takeover interest from Comcast ( CMCSA ). ATUS shares have lost 62% in the past year:
ATUS Share Price (Last 1 Year) Source: Google Finance (06-Mar-23). |
ATUS stock has lost 78% since we downgraded our rating to Hold, suggesting it should be avoided, in 2021.
We do not believe ATUS will be acquired by Comcast in the foreseeable future. With an Enterprise Value exceeding $26bn, ATUS may be too large to acquire. ATUS has deep underlying problems that are difficult to fix. Potential synergies would be limited by existing differences in technology and wireless arrangements. ATUS has only just started another turnaround under new management, and the controlling shareholder is not motivated to sell. ATUS had already tried to sell a substantial part of itself in 2022, but the process ended without a transaction. Comcast’s strategic focus also lies elsewhere. We reiterate our Holding rating on ATUS. Avoid.
Altice USA Hold Rating Recap
Our rating on ATUS is Hold, which means to avoid the stock, based on concerns around its business fundamentals:
- Competition in ATUS markets has intensified
- ATUS' offering may be fundamentally uncompetitive
- EBITDA and FCF may continue to decline
- Management's turnaround initiatives may not be successful
We believe many of ATUS’ problems are company specific and the result of past poor management, including excessive cost cuts and bad strategic choices. We believe ATUS’ historic singular focus on fiber is misguided, it has erred in not focusing on mobile sooner, and it has neglected softer factors such as service quality and automation.
ATUS has been in a turnaround since September 2021, after the abrupt exit of its COO, and initially included accelerating its Fiber-To-The-Home ("FTTH") roll-out, relaunching its Mobile offering and rebuilding its retail outlets and door-to-door salesforce. A sale process for its Suddenlink business was rumoured in July 2022 and later confirmed, but abandoned in December. New CEO Dennis Mathew was hired in September and started in October.
Q4 2022 results on Feb. 22 showed further customer, revenue and profit declines, albeit smaller than before.
Altice USA May Be Too Large to Acquire
With an Enterprise Value exceeding $26bn, ATUS may be too large to acquire.
While ATUS has a market capitalization of just $1.86bn, it has net debt of $24.2bn. This means that, even before any acquisition premium, any transaction would have a size of more than $26bn:
ATUS Share Price (Last 1 Year) Source: Company filings. |
The $26bn+ Enterprise Value implies an EV / EBITDA multiple of 6.8x, which is only around 1x cheaper than Charter Communications’ ( CHTR ) 7.7x. (Comcast’s valuation is not directly comparable due to its media assets.) Comcast shares currently have a P/E of less than 10x (as we discussed last week), and this relatively low valuation also is a reason for management not to use stock in an acquisition.
An all-cash transaction to acquire ATUS, even without a premium, would raise Comcast’s Net Debt / EBITDA to 2.8x, above its 2.4x target and likely to lead to a pause in its buybacks. Given Comcast’s relatively cheap valuation, we believe Comcast will prefer the certainty of its buybacks as a way to create value.
Comcast has in any case avoided using stock in recent years, likely reflecting the desire of the Roberts family not to dilute their ownership. (Ralph Roberts founded the company, his son Brian serves as the CEO of the company and the family still controls 33.3% of the votes). Comcast last offered to use stock in an acquisition in its aborted attempt to buy Time Warner Cable in 2014. Its (also aborted) offer to buy Fox ( FOX ) in 2018 was all cash, as was its subsequent acquisition of Sky. Both Fox and Sky were seen as transformative acquisitions of relatively high-quality assets, whereas ATUS would be a bolt-on acquisition of a much lower-quality asset.
Altice USA Problems Are Hard to Fix
ATUS has deep underlying problems that are difficult to fix.
As of Q4 2022, ATUS had year-on-year declines of 2.4% in Broadband customers, 1.3% in Broadband revenues, 6.0% in total revenues and 15.7% in Adjusted EBITDA, in contrast to the positive growth at Comcast. While we believe at least some of ATUS’ problems are self-inflicted, fixing them will not be easy or quick.
ATUS P&L Headlines (Q4 2022 vs. Prior Periods) Source: ATUS results release (Q4 2022). |
ATUS also has some structural disadvantages. Its Optimum East footprint (largely the old Cablevision business) has a telco overlap of as much as 70% with Verizon ( VZ ) alone, plus an undisclosed (and growing) amount of fiber overbuild from Frontier Communications ( FYBR ). Its Optimum West footprint (formerly Suddenlink) has a lower overbuild percentage of 25% (50/50 split between AT&T ( T ) and others), but was actually seeing higher churn to telco fiber and Fixed Wireless offerings, likely due to ATUS’ lower networks speeds there:
“Mainly we are seeing incremental competition in the Suddenlink footprint, which is no surprise as AT&T continues to increase its fiber footprint and we do have some smaller operators out there that are overbuilding.”
Dexter Goei, then ATUS CEO ( Q1 2022 earnings call )
“Where we don't see lower activity from a gross add standpoint is in our Suddenlink footprint … But we do see an uptake in churn, due to competitive environment, whether be at FWA (Fixed Wireless Access) or fiber overbuilders. We can isolate to the markets where we see fiber overbuilders and tell you that we have incremental churn that probably leads to a majority of the impact that we're seeing in Suddenlink on a quarterly basis
Dexter Goei, then ATUS CEO ( Q2 2022 earnings call )
Comcast has a lower telco fiber overlap of about 45%, though expected to rise to 60% in the next few years.
Given Comcast is facing competition from the same providers in its footprint, we do not believe it will divert its management time and action to try to solve ATUS’ problems.
Altice USA Synergies May Be Limited
Potential synergies will likely be limited by existing differences in technology and wireless arrangements.
ATUS has pursued a fiber-centric strategy. As of 2022 year-end, 22% of its passings (2.16m out of 9.46m) are on Fiber-To-The-Home (“FTTH”):
ATUS FTTH Passings (Since Q4 2021) |
Comcast, by contrast, has continued to upgrade its Hybrid Fiber-Coaxial (HFC) infrastructure on DOCSIS technologies, with a capability to deliver 1 Gbps download speeds across its network. Fiber and HFC are different technologies, with differences in network maintenance and customer installation that would limit the synergies in any potential Comcast-ATUS combination.
Comcast and ATUS also have different wireless arrangements. Comcast has been using Verizon as its MVNO partner while ATUS has been using T-Mobile ( TMUS ). Should Comcast take over ATUS, it would likely want to use Verizon for its entire wireless network, but would likely face substantial termination costs on the T-Mobile relationship, especially as it was extended in a “multi-year MVNO agreement” as recently as in March 2022.
Altice USA Has Only Started New Turnaround
ATUS has only just started another turnaround under new management. New CEO Dennis Mathew only started in October 2022, and has just announced several new senior hires in February. He also announced key changes to the ATUS strategy, for example a reduction in its FTTH program, last month.
Patrick Drahi is the controlling shareholder at ATUS, owning 44% of the equity and controlling 92% of the votes. In the absence of a substantial premium, we do not believe he will be motivated to sell now without observing the performance of the new team and new strategy first.
Altice USA Already Tried A Sale Process
ATUS had already tried to sell a substantial part of itself in 2022, with a formal sale process initiated for its Suddenlink business (confirmed in August), supposedly due to in-bound interest, only to be terminated in December.
If Comcast was interested in acquiring ATUS, it would have been a natural participant in that process, and could have easily made an offer for either Suddenlink or the entire ATUS group at that stage. Equally, had Patrick Drahi been motivated to sell at the valuations available at the time, he could have done so.
The failure of the Suddenlink sale is a good indicator that there will not be a transaction for ATUS now.
Comcast Strategic Focus Is Elsewhere
We do not believe Comcast is interested in acquiring more U.S. Cable assets, as its strategic focus lies elsewhere.
As mentioned above, it already had an opportunity to bid for Suddenlink back in 2022. Similarly, where smaller U.S. Cable assets have come up in recent years, they have been acquired by ATUS and not Comcast. (Examples include the $150m acquisition of Service Electric in 2020 and the $310m acquisition of Morris Broadband in 2021, as well as the aborted $3.6bn bid for Atlantic Broadband in 2020.)
Comcast has been more interested in acquisitions outside U.S. Cable. The offer for Fox would have augmented its NBC Universal media business, while the actual acquisition of Sky added media assets and brought it into the U.K. connectivity and video distribution markets. While these are large assets with values in the tens of billions, Comcast also made smaller acquisitions like that of Masergy, a provider of Software-Defined Networking and cloud platforms. There has also been recent speculation about Comcast acquiring Paramount Global ( PARA ) or buying out Hulu, albeit dismissed by management with varying degrees of conviction.
Buying ATUS would push Comcast’s leverage above target and removes its ability to do other deals that are more in with its strategy. We do not believe this would be acceptable to Comcast management.
Conclusion
We do not believe comcast is interested in acquiring Altice USA, and reiterate our Hold rating. Avoid.
For further details see:
Altice USA: Why It Will Not Be Acquired By Comcast