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Billionaire Drahi Tests the Limit of Leverage at Altice: Gadfly

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Billionaire Patrick Drahi built a telecommunications empire on debt. But he’s finding out there are limits to what leverage can do. More communication, rather than more spending, should be his next step.

Shares of Drahi’s telecom group Altice NV began their plunge after a set of weak results this month. The exit of the CEO on Thursday did nothing to stem it. Altice fell a further 15 percent on Tuesday, hitting its lowest in a year. Even though the stock clawed back some of that loss on Wednesday, it’s still down by almost half since the start of November. 

What began with skepticism about Altice’s ability to deliver revenue growth in the face of competition, especially in France, by spending on its network and on media content has become a full-blown bear attack on the stock. Altice has become a battleground over how to value a telecoms company whose indebtedness is more than twice that of its peer group.

Morgan Stanley analysts warned on Tuesday that the shares still trade at a 14 percent premium to peers on an enterprise value to Ebitda basis, and could have further to fall. 

Quick fixes, like management reshuffles, are of limited value. If anything, the message that Drahi and his lieutenants are back in control has emboldened skeptics who doubt there is a viable strategy in place. The proportion of shares on loan has risen steadily past the 5 percent mark, indicating short-sellers are laying more bets against Altice. Trading in put options on the stock has also surged.

This is the kind of radical turn in sentiment that is hard to stem. It certainly won’t change much on its own. In the French market, Altice’s bold takeover of mobile operator SFR has been bogged down in restructuring and hit by customers defecting to rivals that have cut prices and spent money improving their networks.

The dream of more mergers to take out competitors is looks more distant by the day. Perhaps Drahi has some strategic cards left up his sleeve, such as slowing the pace of content investments under new French head Alain Weill. If so, he should play them. Investors could do with more details on the future outlook.

Beyond clarifying the long-term strategy, Drahi needs to take short-term measures to improve confidence, limited as they may be. Altice has already announced a share buyback, back in August, which has done nothing to assuage views that the firm is out of ideas to boost returns without piling on more debt. Investors are looking for signs that Drahi is willing to curb his ambitions and his company’s leverage, not double down on them. A falling share price doesn’t make this any easier.

Kepler analysts reckon some of Drahi’s Altice shares have been pledged as collateral for some borrowing — even though that drag on the stock should have been removed when the billionaire paid off the loans he’d used to buy his stake in November 2015. This speculation only adds to the pressure, so more transparency on such transactions would be welcome.

One course of action could be to embark on a multi-pronged defense, similar to retailer Casino SA after it was targeted by short-seller Muddy Waters in 2015. Casino rebuffed the short-seller and responded not just with more communication with investors, but also with a debt-cutting program and asset sales.

The latter may seem a stretch right now, given that Altice has cash in the bank and doesn’t face a big refinancing until 2022. But a weak stock price makes any future refinancing tougher, and leaves little financial headroom to absorb any unexpected shocks.

The era of cheap debt, which has served Drahi so well, may be coming to an end. As central banks start raising borrowing costs globally, financing costs are at a watershed moment. Drahi needs to calm the market — while he still can.

–With assistance from Gadfly’s Chris Hughes.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

©2017 Bloomberg L.P.

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