Download - Short Altice Presentation Sohn Conference
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Disclaimer The following presentation represents ION’s analysis and opinions, and
is based on publicly available market information and regulatory filings
by Altice. This is not an offer to buy or sell securities of Altice, nor
should it be taken as advice on whether to purchase or sell securities of
Altice. ION may have positions, short or long, in the companies
discussed in this presentation. For further information, we encourage
readers to review Altice’s publicly available filings.
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Boom and bust cycles – history repeats itself
History is replete with the remains of once high-flying industries and over-
leveraged companies
Source: Bloomberg
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1000
Potash price per tonne, $
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Africa-Israel share price, ₪
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Altice overview - Altice is a Pay-TV/mobile operator in Europe, Israel, and most recently the
US with net debt/EBITDA of 5.7x
Creation of dual
class structure to
fund M&A while
protecting
majority control
Altice “created” €15bn worth of equity value in 21 months
Source: Bloomberg
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400
500%
ch
an
ge
Altice STOXX Europe 600 Telecommunications
Drahi sells
€550mn in
IPO
Drahi sells
€290mn
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Telco M&A frenzy
The sector’s current EV/EBITDA multiple is 6.8x, up from 5.6x 5 years ago
Source: Bloomberg;
Altice and Vivendi
filings
*offer rejected
5.9x 7.0x 6.9x
10.1x
14.0x
10.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
Sector 5 yrhistoricalaverage
SFR ('14) PortugalTelecom
('14)
Suddenlink('15)
Bouygues('15)*
Cablevision('15)
EV
/EB
ITD
A m
ultip
le
Altice has overpaid for its acquisitions
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Industry headwinds threaten traditional Pay-TV
- 7.3% of US households have broadband but
no pay-TV subscription, up from 4.2% in 2010
- Rise of alternative OTT players
- Broadband connection has become
commoditized – aka “dumb pipe”
Altice valuations have soared as sector headwinds have accelerated
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Implausible EBITDA margins - Altice claims that it has increased margins across its holdings
We question whether HOT’s “real” EBITDA margin has improved by 900bp
Source: Altice Cablevision presentation
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Israel: HOT’s Hebrew disclosure reveals EBITDA margin 500bp
below Altice’s reported number
Only 1/3 of the difference is explained by a management fee paid to Altice
Source: HOT 2Q15 financial statements
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Increasing capitalized expenses to inflate ebitda margins
Israel: We question HOT’s aggressive accounting
Source:
HOT financial statements
1% 0%
6% 5%
10%
0%
2%
4%
6%
8%
10%
12%
2010 2011 2012 2013 2014
% of content costs shifted from P&L to Balance Sheet
Altice
acquired
majority
ownership
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When adjusted for capitalized content costs, margin improvement is negligible
Israel: Adjusted margins paint a different picture
Source:
Altice 2Q15 financial statements;
HOT 2Q15 financial statement;
ION research based on Hot public
filings
48%
43%
41%
36%
38%
40%
42%
44%
46%
48%
50%
Altice reportedmargin for HOT
2Q15
HOT reportedmargin 2Q15
Adjusted HOTmargin 2Q15
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Israel: Cost-cutting went too deep
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2011 2012 2013 2014
Su
bscrib
ers
, k
Israel Pay-TV subscribers
HOT (-6% CAGR)
Yes (+2% CAGR)
Analysts assign rich valuations to HOT (average 8.6x 2016 EBITDA) while
incumbent Yes/Bezeq trades on 7.3x and is experiencing stronger commercial
success
Source: HOT financial statements;
Yes financial statements
Source: Bloomberg
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Cablevision: Does this deal mark the top?
- Altice is paying a historically high multiple of 10x EBITDA for Cablevision
- Unsecured bonds raised for the Cablevision deal were sold at over 10%
yield, reflecting doubts around the company’s ability to service its debt
New average cost of
debt: 7.5%
Leverage level: 7.4x
pre synergies
Source: Bloomberg
6%
10%
2%
4%
6%
8%
10%
12%
Day before Alticeacquisition
Current
Yie
ld o
n 2
022 C
ab
levis
ion
bond
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Cablevision: Cost-cutting targets are unrealistic
Content costs Content costs
Non-content costs Non-content costs
-
1
2
3
4
5
6
2014 2018e
$, bn
Increasing 7.5% per
annum
Implied 33% reduction in
other operating costs
“Management has articulated longer term cost reduction targets to the equity market
which far exceed $450 million in savings promised to bondholders. Moody's views this
more aggressive target as a longer term, aspirational goal” – Moody’s, September 24, 2015
Source: Cablevision 2014 10k;
ION research
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Cablevision: We’re skeptical of margin targets
Cablevision synergy targets of $900m appear lofty especially considering
fiber competition, lack of mobile offering, and rising content costs
32% 35%
43%
25%
30%
35%
40%
45%
50%
Cablevision US Cable average Altice target forCablevision
EB
ITD
A %
Cablevision margin unlikely to reach Altice target
Source: Altice Cablevision
presentation
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Wall Street overlooks the issues - “Our 12-month ROIC-based price target of €41/shr incorporates a premium above our €30/shr valuation
to capture Altice’s M&A potential” –Goldman Sachs note on Altice, Sept 8, 2015
- “Given that the NAV is clearly growing, we place a 25% premium to NAV in determining our €38.00/share equity valuation.” –RBC Capital note on Altice, Sept 18, 2015
- “Adding €3.5bn for a 50% probability of a revived Bouygues deal and a further € 4.7bn from additional M&A (based on our “PE” model) leading to a post-M&A Dec-16 TP of €28. –JPMorgan note on Altice, Sept 1, 2015
- Citi adds €2.5 of value for unknown future deals to Altice’s price target in a Sum of the Parts
Lucrative Wall Street fees ($200m for Cablevision alone) coincide
with many sell-side analysts assigning lofty multiples and adding
value for unknown future deals
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10 questions for Altice management 1. How do you explain fully the discrepancy between HOT’s reported 2Q15 43% EBITDA margin and your reported HOT
margin of 48%?
2. Why has HOT been aggressively growing capitalized content costs while reducing expensed content costs?
3. Has Numericable shifted content costs from the P&L to the Balance Sheet?
4. When do you expect to reverse subscriber losses in Israel and France?
5. How much are content costs expected to rise at Cablevision over the next 3 years?
6. How can Cablevision without a mobile offering effectively compete against Verizon triple play?
7. Can you explain the difference in Cablevision cost-cutting guidance between equity holders and bond holders?
8. Why do you think that you can generate EBITDA margins in the US that far exceed those of any other US operator,
including those with greater scale?
9. Why did you create a dual class structure despite the Expert Corporate Governance Service advising against it?
10. Your aggressive cost-cutting efforts in Israel resulted in a large number of customer losses “due to poor service” and
you’ve had to invest in “restoring customer service levels” (Altice 3Q14, 1Q15 earnings releases) . Why do you believe
that this creates long-term shareholder value?
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Summary History is replete with sectors whose valuations reached
disproportionate levels and then crashed. Every boom and bust cycle has a poster boy. In this cycle, it’s Altice
1. We believe that Altice’s operating track record is far less
impressive than we’re led to believe
2. We question management’s ability to retain subscribers and their
use of aggressive accounting to “improve” EBITDA
3. In our view, Altice has overpaid for Pay-TV acquisitions against
the rising tide of OTT alternatives and cord cutting
4. On realistic multiples, we believe shares are worth ~50% below
the current price