(Bloomberg Opinion) -- The billionaire Patrick Drahi built his transatlantic telecoms empire on a mountain of debt that at times imperiled its survival. That hasn’t dispelled his appetite for more.
On Friday, Drahi made a 2.5 billion-euro ($3 billion) offer to acquire the roughly 47% of Altice Europe NV that he doesn’t already own. It’s an opportunistic move. The shares had lost half their value from a February peak. The continued low cost of debt means Drahi is likely able to fund the buyout with yet more borrowed cash.
Shareholders might feel a little hard done by. Over the past few years, Drahi and his team have made significant progress. They’ve simplified the capital structure by separating the U.S. business from the European one centered on France, steadily grown earnings and sold stakes in lucrative network assets to infrastructure investors.
Before the impact of the Covid-19 pandemic rattled equity markets, the stock was on the upward trajectory, hitting 6.74 euros. Drahi’s offer, worth 4.11 euros per share, is a premium to Thursday’s closing price, but still significantly below that zenith.
The operations have been affected by the virus, but the impact may be temporary. Revenue in the media and business-services divisions have declined, as advertising spending has fallen globally and the work-from-home trend keeps people out of offices. Investors might reasonably expect those operations to recover if a vaccine becomes available. Analysts predict a doubling of free cash flow next year.
As well as giving Drahi full exposure to this potential upside, 100% ownership would strengthen his hand should the prospect of consolidation in France, where his SFR unit is the third-biggest operator of four, rear its head again. An earlier mooted combination with Bouygues SA's telecoms unit stumbled in part because Drahi sought a role operating the business even though he would have owned a minority stake in the new entity.
While Altice had an enterprise value of 40 billion euros prior to Drahi’s offer, just 4.2 billion of that came from its market capitalization, with the rest of it debt. That means that its share moves have been particularly extreme. Indeed, Altice stock is twice as volatile as the average for European telecoms peers.
Altice looks like it doesn’t really belong on the public markets. Its indebtedness is outside stock-market investors’ comfort zone, yet it could take on more leverage if private. If Drahi can achieve the acquisition by borrowing against Altice, the company’s effective net debt would rise to 6.6 times next year’s estimated Ebitda, up from the current 6.2 times. It’s a blow to bondholders, who have been encouraged by the steady improvement of recent years, but only a mild one.
This all assumes Drahi can persuade his minority investors to sell out at a price damaged by the pandemic. He certainly hasn’t gone in with a knock-out bid. But with the shares trading only just above his offer, investors aren’t demanding one.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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