In a research report Monday, Sanford Bernstein media analyst Peter Supino wondered aloud what many investors and analysts have been quietly thinking: Is Altice USA’s plan to possibly ease back on its share-repurchase program aimed at conserving capital or just a way for the company to test how low the market will drive its shares? Supino appears to favor, at least for now, the latter scenario.
“We see a good and better than consensus probability that the company is testing the equity markets with its communications,” Supino wrote in a note to clients Monday, adding that Altice USA appears to be strongly capitalized and doesn’t have a debt maturity due until 2025, yet says it may de-lever instead of repurchasing its shares.
Adding to the confusion is that Altice USA has been an aggressive purchaser of its stock in past years at relatively high prices — it paid about $2.3 billion for 18% of its outstanding shares last year at an average price of about $36 each.
“A company so focused on its own resilience and ability to arbitrage debt and equity markets should not be deterred by a subscriber net add shortfall,” Supino wrote. “Is this formerly risk-seeking executive team suddenly feeling afraid of failure? We doubt it very much.”
Altice USA shares have fallen hard and fast in the past two weeks, after CEO Dexter Goei told an investor conference that it would report negative broadband subscriber growth in the third quarter, and that it was halting its share repurchase program as it awaited the impact of its new growth strategy, essentially increasing capital spending to build out its network and boost gross subscriber additions.
Analysts have been speculating for months that Altice USA may go private as its stock price declined. In early September, MoffettNathanson principal and senior analyst Craig Moffett wrote in a research report that Altice could sell off its Suddenlink operations in the Midwest and buy the remainder of its public float for less than $8 billion. After Goei said at the Goldman Sachs Communacopia conference that it expected to lose between 15,000 and 20,000 broadband customers in the third quarter, other analysts concluded that going private could be an attractive option.
Sparking a Share-Price Slump
Altice USA stock fell 23% between Sept. 22 and 29, reaching a new 52-week low ($19 per share) on Sept, 28. The shares have begun to rebound in subsequent trading -- the stock closed at $20.02 each on Oct. 1, and were trading as high as $20.25 each in early trading Oct. 4, but are still 20% behind its close of $25.26 on Sept. 22. So far this year, Altice USA shares are down about 45%.
Supino added that the panic around the expected broadband subscriber losses may also be unfounded, because it appears that the bulk of the hit is occurring in Altice USA’s Optimum footprint, specifically in areas where it competes against Verizon Communications’ Fios.
According to Supino, in the non-Fios Suddenlink footprint, which accounts for about 70% of its total homes passed, it is adding broadband subscribers.
Supino noted that Fios overlaps about 20% of Optimum’s territory and added about 200,000 broadband subscribers during the past four quarters, meaning that the competition accounts for about 40,000 customers lost inside the Optimum footprint. Adjusting for its Morris Broadband purchase in February, which added 35,000 customers, and consensus has fallen by about 65,000 customers for Altice USA. So a 25,000 subscriber shortfall to Q3 consensus estimates for the rest of the footprint — about 7 million homes passed for both Optimum and Suddenlink — doesn't seem that bad.
“Not that we disagree with the company’s intent to invest more in foregone pricing, sales/marketing, and capacity,” Supino wrote. “But if this ice cube is melting, it appears set to keep shareholders afloat, or cool, or whatever metaphor seems apt, for a long time.”
And that all of this is happening during one of the most uncertain periods for subscription-anything businesses — the pandemic — is all the more reason for investors to exercise patience as Altice USA evaluates its options, Supino wrote, adding that dismantling the company could be a viable option.
“Altice can unlock massive value in a breakup of the company,” Supino wrote, adding that Charter Communications, the remaining pure-play cable operator, trades at around 11 times cash flow while recent private cable transactions have had multiples ranging from 12 to 14 times for and infrastructure assets have commanded even higher values.
Floating Sale Scenarios
Supino estimated that if Suddenlink were sold for about 12 times cash flow, or a 4.5-times-cash-flow premium — its current market value — Altice could hold Optimum for a net equity value of about 6 times cash flow. And since nearly all of Altice USA’s programming costs serve its Optimum customers, combining that asset with Comcast or Charter, which could drive those costs down even further, would make such a deal even more attractive.
That, of course would all depend on Altice USA’s desire to do so, and so far the company has given no indication that that is its intended path. Goei has said publicly that it expects to continue to build its fiber network and hopes some initiatives that began last month like increasing the speed of its Optimum Advantage affordable broadband product, and rebranding its products under the Optimum name, will help boost subscriber rolls in Q4.
But if the ultimate goal is either to go private at a premium — some analysts have suggested that $30 to $45 per share could be a good price — to sell the company outright, or even to keep investing in the business to grow, Supino’s call for investor patience doesn’t seem like such a bad idea.
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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