Altice USA said subsidiary CSC Holdings will issue $1 billion in debt securities to help finance a $1.5 billion special dividend tied to a planned split with its European parent.

Altice USA announced earlier this month plans to separate its U.S. and European operations, forming Altice USA and Altice Europe. The split is expected to be completed in the second quarter. As part of the agreement, Altice USA said it would issue a one-time cash dividend to its shareholders prior to separating.

In a statement Tuesday, Altice USA said its wholly-owned subsidiary CSC Holdings has priced $1 billion in senior guaranteed notes due 2028, with an interest rate of 5.375%. The notes will pay interest semi-annually on Feb. 1 and Aug. 1 of each year, beginning Aug. 1, 2018. The notes will mature on Feb. 1, 2028. The offering is expected to close on or about Jan. 29.

According to Altice USA, the offering will be used together with the proceeds from term loans made available to the issuer, borrowings from a revolving credit facility and cash on its balance sheet, to refinance certain debt and fund the special dividend.

Altice USA stock, weighed down by the enormous debt load of its parent, European telecom stalwart Altice N.V., is getting some needed relief in the form of a spinoff that should remove at least some of the shackles that have restrained the shares since the company’s June IPO.

Altice N.V. announced its plan to complete the split from the U.S. division by the second quarter. As part of the deal, Altice USA will issue a $1.5 billion dividend, which will mainly fall to the Altice N.V. shareholders that own about two-thirds of the U.S. unit. After the deal is closed, the European operation will be renamed Altice Europe and be led by current Altice N.V. chief financial officer Dennis Okhuijsen, rising to CEO. Former CEO Michel Combes left the company in November and was named president and CFO of Sprint earlier this month.

Altice USA CEO Dexter Goei and his team will remain in their current roles after the closing. And Altice founder Patrick Drahi will remain in control of both companies, serving as president of Altice Europe and chairman of Altice USA.

The separation should remove one of the biggest overhangs on Altice USA stock — its parent’s heavy debt load and uncertainty surrounding the European telecom market. Altice USA went public in June 2017 at $30 per share and enjoyed a strong run-up in the days after the IPO, rising as high as $34.30 per share by June 23. But concerns over that heavy debt — about $55 billion — and competitive issues over its wireless business in France negatively affected the U.S. stock. Altice USA finished the year down about 35% ($11.48 each) to $21.23 per share.

Investors appeared pleased with the split, driving Altice USA shares up 9.6% Jan. 9 to $23.11 each.

Taking the Long View

While the split was expected to remove much of the onus on the U.S. stock, Goei, in a conference call with reporters after the transaction was announced, said short-term market reaction is not one of the company’s biggest priorities.

“We feel we’ve positioned the U.S. stock and the European stock to perform to the best of its abilities and to reflect appropriately the value that the respective business should be valued at relative to its peers,” Goei said. “Let’s see how the market reacts, but this is obviously not a short-term thing we are doing today.”

In a research note, Jeff Wlodarczak, Pivotal Research Group CEO and senior media & communications analyst, wrote that the spin solves a lot of problems for the U.S. operations. It not only removes concern that the U.S. business may be pressed into shoring up the European operations (particularly in France), but also simplifies the structure and boosts the U.S. stock’s public float from 10% of outstanding shares to 42%, which should attract a wider swath of investors and free the company to return capital to shareholders through more aggressive buybacks.

Altice USA said that as part of the separation, it plans to buy back about $2 billion of its stock over the next three years.

But this plan doesn’t solve everything quite yet. Despite a management pledge to reduce leverage targets from 5.0-to-5.5 times cash flow to 4.5-to-5.0 times, initially the deal will increase debt at the U.S. company to about 5.8 times cash flow.

That added debt and the overall climate around deals means it is unlikely that Altice USA will embark on any buying spree — one of the early reasons to buy the stock — anytime soon.

“I don’t think we are there yet in terms of thinking about where our acquisition strategy could be,” Goei said on the reporters’ call. “I think this is an important moment for the group to focus on our existing operations and deliver on what we’ve promised in our respective geographies in Europe and the U.S. Over time, we suspect that the clarity and simplicity of our structure will help our investor base be supportive in things that we may want to do going forward.”

But he hinted that M&A isn’t totally out of the picture. “The DNA of the group is to try and grow strategically over time, but it is clearly not a focus today,” he said.

New Commitment to U.S. Arm

For now, the deal appears to further solidify Altice’s commitment to the U.S. operation. Problems at its European unit began to surface in November, when a big earnings shortfall at the company’s French wireless operations spooked investors, sending the European stock into a tailspin. For U.S. investors, the French unit’s failures signaled possible flaws with the domestic model, and the possibility that the U.S. business would be pressed to bail out its parent.

And though many analysts were skeptical of Altice’s cost-cutting ambitions — when it bought Cablevision in 2016 it pledged to shave $900 million in expenses, a move many believed would eviscerate the company — it has so far kept its promise. In Q3 Altice USA said its run-rate non-programming efficiency savings were more than $900 million since the Cablevision purchase.

In a research note in November, MoffettNathanson principal and senior analyst Craig Moffett noted that per-subscriber programming costs increased between 6% and 7% at Altice USA, almost half the 12.7% increase at much larger Comcast in the period. While Altice said it expects future programming-cost increases in the high single digits, Moffett added that Altice has captured much of the efficiencies it promised already, and there is no reason to believe more won’t come.

“With margins still rising rapidly, both [year-over-year] and sequentially, it doesn’t appear they are done yet,” Moffett wrote in the report.

European telecom giant Altice N.V., parent of No. 3 U.S. cable operator Altice USA, announced a sweeping management restructuring Friday that will see the CEO of the operation step down, while the chief of its domestic operations will assume a dual role.

Altice N.V. CEO Michel Combes resigned Friday and Altice USA chairman and CEO Dexter Goei will take on the additional role of CEO of the European parent. Altice founder Patrick Drahi will also return as president of the board of directors of the European telecom giant.

The moves come after Altice N.V. has stumbled in its European telecom business. Its stock was down more than 20% Nov. 3 after a disappointing third quarter and the revelation that it would come in at the low end of earnings guidance for the year. So far this year Altice N.V. shares are down about 40% and the bleeding has spread to Altice USA, which has seen its stock fall more than 25% since its June IPO, mainly, according to analysts, because of its ties to the parent company.

According to reports, some investors have worried that Altice N.V.’s poor results could jeopardize its ability to service its heavy debt load – about five times its cash flow and substantially higher than its European telecom counterparts.

In a statement Altice N.V said the new management structure “is designed to better implement Altice's strategy, create clearer accountability amongst management and improve the operational and financial performance of the business. It aligns more fully the interests of founders and group management, both with significant ownership in the group, and the public shareholder base.”

In addition to Drahi’s and Goei’s new roles, Altice N.V. chief financial officer Dennis Okhuijsen will assume the additional role of CEO of Altice Europe; and SFR Media CEO Alain Weill was named chairman and CEO of SFR Group and chief operating officer of Altice Media.

"Michel has been an important part of the Altice story when he first joined the Board of Altice,” Drahi said in a statement. “He provided key support and judgment as we developed our expansion strategy.  As CEO, Michel critically created the group structure to operate a transatlantic communications business while driving key technology, research and innovation initiatives, which will serve Altice for the future.  I would like to personally thank him for his contribution, integrity, loyalty and friendship."

Combes joined Altice N.V. in 2015 as chief operating officer, after leaving equipment maker Alcatel-Lucent which was acquired by Nokia. He became Altice CEO in 2016, when Goei stepped down from that role to take over as head of the U.S. cable operations.

"I would like to thank Patrick and the team for their confidence over the past years,” Combes said in a statement. “It has been a privilege to be part of the Altice story, accompany the expansion of the group and lead the industrialization of the convergence strategy. With Patrick returning as President of the group, Altice will be well positioned to execute its strategy across all operations."

Altice USA stock was hammered Friday morning, down more than 15% in early trading, after its parent company, European telecom company Altice N.V., said full-year cash flow growth at its international telecom operations would come in at the lower end of previous guidance.

Altice USA shares were down more than 15% in early trading to $20.66 each ($3.84 each). The stock finished the day down 7.8% ($1.91 each), closing at $22.59 per share.

The fall-off in the U.S. operation appears to be strictly guilt by association as the decline closely followed those of its parent company stock, traded on Amsterdam’s Euronext Exchange. Altice N.V. shares were down in the double digits most of the day, closing Nov. 3 at 12.51 euros, down 22.6% or 3.65 euros each.

Altice USA released its Q3 results Thursday afternoon and, despite headwinds in the cable business overall as cord-cutting and skinny bundles continue to erode video subscribers, results were generally better than expected.

But at the international operations, Altice N.V. said cash flow guidance would be at the “low end” of the high-single digit percentage range. It previously had expected growth to be in high-single digit percentages. Revenue at the international operations was down 1.8% in Q3, with cash flow up 1.8%.

Revenue at the U.S. business grew 3.2%, and cash flow was up a healthy 18.9%, fueled mainly by the company's aggressive cost-cutting methods.  

“From a fundamental perspective the [U.S.] stock should be up on these results vs. the current 15% decline,” said Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak. But he added that the combination of the guidance adjustment by the parent and the overall negative sentiment from investors in the U.S. cable business over cord-cutting and competition was a big factor in driving down the share price.

“The irony is that prior to 3Q Altice NV and Altice USA have been trading off due to concerns around the U.S. outlook,” Wlodarczak said. “They beat in the U.S., and the stock dumps anyways.”

Altice USA went public in June at about $30 per share and enjoyed early gains as speculation about possible consolidation moves goosed the stock. But as those deals haven’t materialized, the stock has declined. Altice USA’s stock price was down by about 28.6% between June 23 – it’s high point – and Nov. 2. With the stock’s decline Friday, shares have plunged nearly 40%.

In a research note Thursday, MoffettNathanson principal and senior analyst Craig Moffett said that although Altice USA lost subscribers in Q3, it has managed to squeeze substantial margin growth from its operations. Margins, at about 44.1%, are near what the company promised when it first purchased Cablevision Systems in June 2016, and are easily outpacing industry averages.  

In a note to clients Thursday, Moffett wrote that so far Altice USA’s growth hasn’t suffered, adding that the Q3 results make “clear that the cost-cutting story remains on track,” adding that although its growth rates aren’t at the same level as larger peers like Comcast and Charter, they aren’t behind by much.

“With stable unit metrics, rising prices, and falling costs, near-term numbers look very good,” Moffett wrote. “Perhaps that will be enough to convince investors to set aside their terminal growth rate anxieties.”

European telecom company Altice N.V. said it is exploring the possibility of launching an initial public offering of a minority interest in Altice USA.

Altice USA is the domestic arm of the Dutch-based telecom company. Altice USA has about 4 million cable customers, through its purchases of Suddenlink Communications ($9.1 billion) in 2015 and Cablevision Systems ($17.8 billion) in June.

Speculation has been high that Altice USA would eventually go public ever since it was formed. An IPO would give the cable operator a deal currency to do more deals. But it is unclear as to what the IPO would entail and details were sketchy.

“No decisions have been taken at this point on the structure or timing of any IPO, and no assurance can be given that an IPO will be pursued,” Altic N.V. said in a statement.