What's It All About, Altice?
In the latest head-shaking move in the continuing US cable M&A saga, Altice has swung a deal to buy Suddenlink Communications and is reportedly eyeing a much bigger target in Time Warner Cable.
But such bold moves may not be so easy for the French communications giant to pull off. It's also not clear yet whether Altice is serious about its reported interest in Time Warner Cable Inc. (NYSE: TWC), which Charter Communications Inc. is actively wooing again, or whether the TWC and Charter sides are just playing more mind games with each other as they continue their prolonged M&A dance.
For one thing, Altice must gain regulatory approval from three different US government entities before it can buy either large US cable company. The Federal Communications Commission (FCC) , Antitrust Division of the U.S. Department of Justice and Committee on Foreign Investment must all sign off on any deal. (See Altice to Buy Suddenlink in $9.1B Deal.)
At least one financial analyst, though, thinks the FCC might actually welcome Altice into the US fold with open arms because of the market competition it would bring. He sees that as especially true in regards to Time Warner Cable.
"The FCC is likely to be delighted by the Altice acquisition," Craig Moffett, senior research analyst at MoffettNathanson LLC , told Light Reading. "It supports the narrative that the Open Internet Order has done nothing to dampen investment in the US, and, if they really do go after TWC, it would help sidestep a potentially problematic consolidation around Charter that would make Charter almost as large as Comcast."
Second, Altice would run into some daunting technical integration issues in taking over Suddenlink Communications and Time Warner Cable. That's because of the significant, albeit narrowing, differences between US cable and European cable and telco networks and operations.
So, from a technical perspective, it's interesting to note that Altice was one of the first two major service providers to sign up as a customer for Cisco Systems Inc. (Nasdaq: CSCO)'s new cBR-8 CCAP product. Altice has already set a roadmap for migrating to both the Converged Cable Access Platform (CCAP) and DOCSIS 3.1, which are two technologies that are making waves across the North American cable landscape and are specifically on TWC's agenda for the next few years.
In addition, as the Wall Street Journal has pointed out, Altice could face some major financial challenges in raising the funds for both its proposed $9.1 billion takeover of Suddenlink and a TWC bid that would likely cost upwards of $45 billion. Altice, which made its mark with record leveraged buyouts last year, is still digesting its recent acquisitions of French fixed and mobile operator SFR and Portugal Telecom SGPS SA (NYSE: PT).
Finally, Altice would encounter some interesting cultural challenges in taking over one or both major US MSOs. That would be particularly true for the French company with Suddenlink, which runs mainly small and midsized cable systems in rural parts of Texas, Louisiana, Arkansas, West Virginia, Oklahoma and Arizona. While Suddenlink ranks as the seventh-largest MSO in the US, with 1.5 million residential cable subscribers and 90,000 business customers, it operates more like a smaller regional player in the rural south and southwest.
Beyond these issues, there's the question of what Alice stands to gain by buying Suddenlink and possibly Time Warner Cable. The Suddenlink deal would certainly give the ambitious French company a solid foothold in the huge US cable market, putting it in a good position for further acquisitions. It would also give Altice a strong regional cable performer that is the dominant video and broadband player in most of its Tier-2 and Tier-3 markets.
"Altice is effectively buying a broadband monopoly because there's no fiber in [Suddenlink's] area," Rich Greenfield, an analyst at BTIG, told the Financial Times (subscription required). Describing Suddenlink as "a well-run operation that is focused on the cash flow out of the broadband business," he noted that "rural cable has always had the benefit of not having the same level of competition. That's why Suddenlink has been successful -- they've really focused on being all about broadband."
Greenfield said Altice could also look at acquiring Mediacom Communications Corp. , a similar midsized US MSO that mainly operates in smaller markets, once it wraps up the Suddenlink deal. Assuming Altice gains regulatory approval, the Suddenlink purchase is expected to close late this year or early next year.
As for Time Warner Cable, it would turn Altice overnight into one of the biggest US and international cable operators. TWC, the second largest US MSO with 14.5 million residential cable subscribers and nearly 700,000 business customers, also controls such prime markets as New York, Los Angeles, Houston and Columbus, Ohio, among others. In addition, the once-lagging TWC is now on a growth spree, after racking up possibly its best quarter yet for subscriber gains. (See TWC Enjoys Victory Lap in Quarterly Results.)
But a potential Time Warner Cable deal also brings further intrigue because of the relationship between Altice founder Patrick Drahi and cable kingpin John Malone, the Liberty Global Inc. (Nasdaq: LBTY) chairman who is fervently backing Charter's M&A ambitions. Drahi sold his first cable company to Liberty Global's UPC outfit in the 1990s and then went to work for UPC for several years before founding Altice in 2001. Drahi has acknowledged in the past that he's a major fan of Malone's. According to a 2014 Wall Street Journal article, Drahi once said, "If there's one entrepreneur I really admire for what he's built up, it's him."
When Malone initially plotted Charter's hostile takeover bid for Time Warner Cable last year, he also gave a nod to Altice. Among the slate of director candidates for the TWC board, Charter included Altice CEO Dexter Goei.
So is Altice now seeking to grow like Liberty Global, thus thwarting Malone's ambitions by aping Malone's tactics? Good question. The saga continues.