Altice USA is close to announcing it will explore the sale of its fiber-fueled Lightpath business, and such a transaction could bring in as much as $3 billion to $4 billion in pre-tax proceeds and give the company's stock a nice jolt, the financial analysts at Cowen and Co. said in a research report.

Cowen believes that Altice USA management could announce its interest in selling Lightpath, a unit that delivers business services via fiber to larger customers, as early as its Q4 2018 earnings call, which is scheduled for the afternoon of Thursday, Feb. 21.

Altice USA declined to comment on the Cowen report, but the company has alluded that it might be game for a wide range of M&A plays. "Buyer or seller, we're open to everything," Dexter Goei, Altice USA's CEO said in December, at a conference hosted by UBS. "If somebody comes and approaches us and wants to acquire us at an attractive number, definitely we would look at that," he said.

While Goei's comments indicate that Altice USA will keep its ear to the ground, Cowen's report suggests that the company is about to take a more proactive stance.

And the idea isn't all that foreign within Altice's broader circles. Altice Europe recently struck a deal to sell off fiber assets of its SFR subsidiary for $2.3 billion. That deal followed an acknowledgment from Altice Europe that a strategic review of its fiber infrastructure was underway.

In 2017, Altice USA, in an attempt to tighten the ties of its acquisitions of Cablevision Systems and Suddenlink Communications, created Altice Business, a unit that combines Lightpath, Optimum Business and Suddenlink Business. That combined unit brought in $344.2 million in Q3 2018, up from $324 million a year earlier. In January, Altice USA promoted Matt Grover to EVP and head of Altice Business Services; he joined the Lightpath division in 2001.

Cowen also listed out a handful of reasons why Altice USA would look to sell Lightpath, including a "highly favorable seller's market," the high capital intensity needed to grow Lightpath, Altice USA's focus on a "core business" with residential connectivity, and as a "compelling catalyst for the stock."

Infrastructure funds viewed as most likely Lightpath suitors
As for who might be in the market for Lightpath, Cowen suggests the most likely buyer would be an infrastructure fund and use Lightpath "as the anchor platform for additional bolt-on acquisitions to materially expand into adjacent contiguous territories." Those under consideration include ZenFi and Cross River Fiber, which completed a merger in September 2018, OCG and Conterra, Cowen noted, holding that those funds are "awash with capital" and have lower turn targets in the range of 9% to 12%.

"It makes sense for Altice [management] to entertain strategic options of its non-core assets and take advantage of the 'feeding frenzy' by selling the asset at perhaps 15-20x while Altice trades at just ~8x," the report added. An industry source said that Cablevision Systems, prior to being acquired by Altice USA in 2016, had given some thought about selling off Lightpath back when it was still being operated separately.

A sale could also enable Altice USA to take advantage of a the "feeding frenzy" in that sector. Of recent note, Zayo Networks is being nudged by certain investors to explore a sale, even though it has already rejected offers from the private equity sector.

Cowen also believes that Altice USA's big presence on Long Island adding value that could be taken from "suburban fiber" that could be tied to 5G and the need to move toward fiber-connected small cells.

But Cowen also sees some possible complications due to integration between Lightpath's fiber-centric approach and the residential HFC network. Notably, Altice USA is also pushing ahead with FTTP upgrades in its Optimum (former Cablevision) footprint in New York, New Jersey and Connecticut.

Carving out Lightpath's fiber footprint in inner-cities, could also create isolated islands, and possibly cause Altice USA to require an indefeasible right of use (IRU) -- or permanent -- deal to interconnect the markets. Such a concession could affect the deal value, Cowen said.

Is it the right play?
Alan Breznick, cable/video practice leader at Light Reading, questions whether selling off Lightpath makes sense for Altice USA, given its ambitious FTTP upgrade activity in the region.

"I'm not surprised that Lightpath is valued that highly so it makes sense that Altice would consider selling it," Breznick said in an email to me. "Yet, on the other hand, it doesn’t make much sense when Altice is so focused on building out its fiber networks. Why give up such a great fiber asset at the same time that you’re building fiber everywhere else?"

As for potential suitors, Breznick sees other possibilities. "Besides the infrastructure funds that Cowen mentions, I would think that Comcast and Charter Spectrum would be highly interested in scooping up the Lightpath assets," Breznick said. "Lightpath would make a really nice addition for either one as they seek to beef up their enterprise businesses further."

And if Altice USA does pursue the M&A angle, that could add some wrinkles to its bigger commercial services business and the people who run it. "If Altice does sell Lightpath, it'll be interesting to see what Grover does because he's a Lightpath veteran, and he'll be losing a good chunk of his portfolio," Breznick said. "Would he go with Lightpath or stick with Altice?"

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— Jeff Baumgartner, Senior Editor, Light Reading