Short Altice Sohn Presentation
ION Asset Management...
Altice - Short Sohn Conference, Tel Aviv October 2015
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.
Boom and bust cycles – history repeats itself Potash price per tonne, $ 1000 800 600
400 200 0
Africa-Israel share price, ₪ 600 500 400 300 200 100 0
History is replete with the remains of once high-flying industries and overleveraged companies 3
Altice overview - Altice is a Pay-TV/mobile operator in Europe, Israel, and most recently the US with net debt/EBITDA of 5.7x 500 % change
Drahi sells €550mn in IPO
Drahi sells €290mn
Creation of dual class structure to fund M&A while protecting majority control
100 0 Source: Bloomberg
STOXX Europe 600 Telecommunications
Altice “created” €15bn worth of equity value in 21 months 4
Telco M&A frenzy Altice has overpaid for its acquisitions EV/EBITDA multiple
10.0x 8.0x 6.0x
Portugal Telecom ('14)
4.0x Sector 5 yr historical average
Suddenlink Bouygues Cablevision ('15) ('15)* ('15)
Source: Bloomberg; Altice and Vivendi filings *offer rejected
The sector’s current EV/EBITDA multiple is 6.8x, up from 5.6x 5 years ago 5
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 6
Implausible EBITDA margins - Altice claims that it has increased margins across its holdings
Source: Altice Cablevision presentation
We question whether HOT’s “real” EBITDA margin has improved by 900bp 7
Israel: HOT’s Hebrew disclosure reveals EBITDA margin 500bp below Altice’s reported number
Source: HOT 2Q15 financial statements
Only 1/3 of the difference is explained by a management fee paid to Altice 8
Israel: We question HOT’s aggressive accounting % of content costs shifted from P&L to Balance Sheet 12% 10%
Altice acquired majority ownership
Source: HOT financial statements
Increasing capitalized expenses to inflate ebitda margins 9
Israel: Adjusted margins paint a different picture 50% 48%
38% 36% Altice reported margin for HOT 2Q15
HOT reported margin 2Q15
Adjusted HOT margin 2Q15
Source: Altice 2Q15 financial statements; HOT 2Q15 financial statement; ION research based on Hot public filings
When adjusted for capitalized content costs, margin improvement is negligible 10
Israel: Cost-cutting went too deep Israel Pay-TV subscribers 700 Subscribers, k
600 500 400
HOT (-6% CAGR)
Yes (+2% CAGR)
200 100 0 2011
Source: HOT financial statements; Yes financial statements
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: Bloomberg 11
Cablevision: Does this deal mark the top? - Altice is paying a historically high multiple of 10x EBITDA for Cablevision
Yield on 2022 Cablevision bond
- Unsecured bonds raised for the Cablevision deal were sold at over 10% yield, reflecting doubts around the company’s ability to service its debt 12% 10%
New average cost of debt: 7.5% Leverage level: 7.4x pre synergies
4% 2% Day before Altice acquisition
Cablevision: Cost-cutting targets are unrealistic 6 5
4 Non-content costs
Implied 33% reduction in other operating costs
2 1 Source: Cablevision 2014 10k; ION research
Increasing 7.5% per annum
“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 13
Cablevision: We’re skeptical of margin targets
Cablevision margin unlikely to reach Altice target 50% 45% 40% 35% 30% 25%
35% US Cable average
Altice target for Cablevision
Source: Altice Cablevision presentation
Cablevision synergy targets of $900m appear lofty especially considering fiber competition, lack of mobile offering, and rising content costs 14
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 15
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%?
Why has HOT been aggressively growing capitalized content costs while reducing expensed content costs?
Has Numericable shifted content costs from the P&L to the Balance Sheet?
When do you expect to reverse subscriber losses in Israel and France?
How much are content costs expected to rise at Cablevision over the next 3 years?
How can Cablevision without a mobile offering effectively compete against Verizon triple play?
Can you explain the difference in Cablevision cost-cutting guidance between equity holders and bond holders?
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?
Why did you create a dual class structure despite the Expert Corporate Governance Service advising against it?
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?
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 - We believe that Altice’s operating track record is far less impressive than we’re led to believe - We question management’s ability to retain subscribers and whether they’ve utilized aggressive accounting to inflate EBITDA margins - In our view, Altice has overpaid for Pay-TV acquisitions against the rising tide of OTT alternatives and cord cutting - On realistic multiples, we believe shares are worth ~50% below the current price 17