Privatization could be path forward for undervalued Altice USA – analyst

Despite concerns about flattening broadband subscriber growth that puts it well behind the pace of its peers, Altice USA is an undervalued company that could unlock its hidden value by taking the company private and perhaps selling select assets, such as its rural-focused Suddenlink properties, Craig Moffett, analyst with MoffettNathanson, suggested in report issued Wednesday.

Moffett explored that idea in a lengthy analysis that aims to unravel the value that's tucked away in Altice USA's disparate and complex mix of urban systems (Optimum) in the northeast, scattered rural systems (Suddenlink), and Lightpath, a fiber-focused business service unit that is now largely divvied up between Altice USA and Morgan Stanley Infrastructure Partners (MSIP).

The analyst points out that Altice USA's stock has taken a beating in recent months, down roughly 20% since it reported Q2 2021 results showing stagnant broadband growth. Those results contrsted with strong broadband subscriber gains by publicly traded US operators such as Comcast, Charter Communications and the rural-focused Cable One.

Moffett reiterated his argument that Altice USA faces a "broadband pricing problem" across the board, and questions whether gains in the rural-focused Suddenlink footprint will make up for any shortcomings in an Optimum footprint that competes against Verizon Fios in several areas. But he also believes that Altice USA, when viewed as the sum-of-its-parts, is still worth far more than what the Street gives it credit for.

"Altice's valuation is simply too cheap, and by a huge margin," Moffett wrote.

Moffett estimates a $51 implied sum-of-the-parts valuation for Altice USA, which compares to the stock's September 7 close of $27.25. The analyst's report appeared to give Altice USA a small jolt, as its stock closed Wednesday at $27.97, up 3%.

"Of course, taking Altice private would require paying a premium, albeit (obviously) only for those shares not already owned," Moffett explained, noting that the potential premium could be in the range of $35 to $45 per share for the remainder of the public float. Fo9llowing this linne of thought, he also outlined a scenario in which Altice USA could sell off Suddenlink and the rest of Lightpath but keep the Optimum (former Cablevision Systems) business with the purchase of the remaining public float.

Even with a premium, Patrick Drahi, Altice USA's billionaire chairman, could end up owning the Optimum piece of the company and its future cash flows nearly debt free, for a fraction of what they are worth, Moffett suggested. Subsequent options, he added, could involve a future sale of those Optimum assets or maybe taking it public… again.

"To be clear, we are not suggesting that going private and then selling Suddenlink is what Altice/Patrick Drahi will do. We're simply illustrating that it is something they could do," Moffett wrote. "There are an infinite number of variations on the theme. The takeaway here is that, even with a meaningful premium, the current valuation is so cheap that it creates enormous optionality."

Among other possible outcomes: "Drahi could conclude that it is more attractive to simply stay the course and retire shares until the remaining float is so small that almost any premium paid to complete the job would be financially immaterial," Moffett noted.

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— Jeff Baumgartner, Senior Editor, Light Reading