The unbearable lightness of the financial strategy of Altice


Before the fall in the price of Altice, Drahi announced that he was taking things in hand. But it was so far away that this return is beginning a true inflection of the strategy followed so far ?
© Eric Piermont / AFP

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The downward spiral in the share price of Altice following the publication of the quarterly results of the group, including those of its principal subsidiary SFR, whose revenue fell 1.3 % to 2.76 billion euros – and the announcement of the decline for the first time of its objectives of turnover and gross operating surplus, without managing to reduce its debt. But this loss of confidence is also fueled by the unbearable lightness of the financial strategy of Altice.

The sharp drop seen since the beginning of the month of November (- 34 %) is also explained by the loss of investor confidence in the financial strategy of the telecom giant and the media and constitutes a serious warning.

The financial strategy of Altice is a beautiful school. This is a company that is greatly in debt to make various acquisitions and has recently proposed a massive program of repurchase of shares. There is not so long ago, this strategy was highly praised. Today, it is not desirable to investors if one believes the market price. Its owner and founder, Patrick Drahi, has built its empire by multiplying the acquisition, financed mostly by debt in a low interest rate environment. Is this strategy sustainable ?

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1. Considerable debt

According to the annual report of Altice, the long-term debt in 2016 amounted to € 52.8 billion and its short-term financial debt, to $ 1.3 billion, or a total of 54.1 billion euros, compared with $ 46 billion in 2015. Year on year, total financial debt increased by almost 18 %. This debt to cash generated by operations, which was € 7 billion in 2016, is 7.7 years in 2016 and 9.9 years in 2015.

The figures (table 1) that translate to them only the considerable level of debt accumulated by the group of Patrick Drahi. Recall that, normally, this ratio should not exceed three years. But this is not all : not only financial debt is considerable, but, at the end of 2016, the fund equity of the group are the negative of 2.3 billion euros. Impossible to calculate a ratio of debt versus equity !

Source Altice, report 2016.

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Any company displaying such figures would be regarded as a firm on the brink of bankruptcy. And yet, until June 2017, the market gave all his trust to Altice. Thus, in November 2016 the market price of the share was around 16 euros and it was 23 euros in may-June 2017.

Today, the action will score more than the 10.3 euros, a drop of more than 50 % compared to its highest level of the year. The firm, which was the highest 31 billion euros, is worth more than $ 14 billion today, a destruction of the value of 17 billion euros in less than six months, and the financial debt (end of 2016) represents nearly four times the capitalization of Altice. The graph shows the precipitous drop in share year comparison with the CAC 40. With a debt as significant, we understand why investors fear a possible increase in interest rates on the group’s performance. There is also a fear that the group has struggled to meet its commitments.

Historical chart ALTICE

2. A massive program of redemption of shares useless

But the unsustainable nature of the financial strategy of Altice is not that in its colossal debt. It is also found in the share buyback programme announced at the end of August 2017, and involving a billion euros. For its leaders, launching a share buyback programme highlighted the group’s confidence in its ability to generate cash.

With this program, Altice, which does not pay dividends, was to pass the message that it had enough cash to meet its commitments and that it could even count on a surplus to pay its shareholders. In short, it was a “good signal” sent to the market on the group’s ability to generate sufficient cash to repay its debts.

But, on October 16, 2017, Altice announced the suspension of its share buyback programme and its replacement by another, by an equivalent amount. This time, the announcement was to deny the promise made to the investors and was a very ” bad signal “. Shortly after, on 3 November, the director-general of Altice US, which brings together the assets listed american of the group, said to give priority to the operational rather than mergers and acquisitions.

A return to normal for a group collecting for the acquisitions ? Indeed, considering the current situation, the main issue of the control group to 60 % by Patrick Drahi is to improve its operational results in order to generate sufficient cash to repay its massive debt. In these conditions, why should we have announced a programme of share buyback of a billion euro and that is a mess ? And this, more especially as the financial theory and numerous empirical studies show that the buyback of shares is not a creator of value (see our article in The Conversation of march 23, 2016 ” the Dividends and stock buybacks do not benefit not the shareholders “). The study of Andew Laptone (recovery in the Financial Times of August 24, 2017), analyst at Société générale, shows clearly that there is ” no extra performance in Exchange of u.s. companies over the periods of redemption for their own actions “. Coming from a financial professional, this result is well-known by researchers in finance will there may finally be heard ?

3. Governance as sanctioned by the principal shareholder

Following the sharp falls in the share Altice on the stock Exchange, the director-general, Michel Combes, has been resigned and Patrick Drahi has announced the resumption in hand of the group. Is it that it will be sufficient to straighten the bar ? We can doubt, as it is likely that the founder-owner of the giant telecommunications and media has never been very far away and that its strategy is not going to change radically. Thus, for Patrick Drahi, to regain the confidence of investors and customers promises to be a daunting task given the sharp fall in the share price, at the time of Altice account on their support to realize his ambition of making the United States its first market.

The group, which became the fourth-largest cable operator in u.s., plays big, as it came to Wall Street at the end of June, and has recently launched into the mobile via an agreement with the local operator Sprint. It has also announced the launch of a set-top box to receive Internet, landline and tv, a first in the United States.

Guest of Grand Jury RTL-LCI-Le Figaro , 12 November, Stephane Richard, CEO of Orange, has expressed doubts about the economic model of Altice. For him, “a business that works, this strategy is a bit constant, a stable managerial teams are highly motivated”. “Where are the criteria of success in Altice ? “The criteria advanced by the CEO of Orange, we could also add a financial strategy less risky and more clear. The future will tell us if Patrick Drahi will succeed his bet. To follow, so !

* Senior teacher of finance, Grenoble School of management.

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