When takeover activities are fueled heavily by debt, it helps to have continual growth in profitability.
Big-spending billionaire Patrick Drahi has turned to creditors once again to part-fund his $17.7 billion takeover of Cablevision Systems Corp. (NYSE: CVC), prompting some concern about the balance-sheet position of Altice , the company that Drahi controls. (See Altice Confirms $17.7B Bid for Cablevision and Altice Close on Cablevision Deal – Report.)
In June, long before the latest deal was announced, Altice had a net debt of about €26.1 billion ($29.8 billion), more than 6.5 times its EBITDA last year. The comparable ratio at France's Orange (NYSE: FTE), Altice's biggest European rival, is about 2.2.
Drahi has been able to woo lenders by fattening profit margins at the various companies Altice has acquired. In France, it has been able to find cost savings by merging Numericable, its cable subsidiary, with SFR, the mobile operator it bought last year.
But Altice has been similarly cost-conscious in its other markets. Indeed, the corollary of its aggressive bidding for takeover targets is perhaps its thrifty management of those it eventually absorbs. In every one of its business units, EBITDA margins had risen between 2013 and the second quarter of this year (when it last issued an earnings report).
The question is whether Altice can continue delivering improvements at these businesses. The company recently brought in Michel Combes, the former CEO of Alcatel-Lucent (NYSE: ALU), to "harmonize best practices throughout our subsidiaries and countries," as Drahi put it. (See Ex-AlcaLu Boss Tasked With Bolstering Altice.)
Combes, of course, is highly regarded for making efficiency improvements at Alcatel-Lucent. Interestingly, though, it was during his tenure that Alcatel-Lucent also burnished its reputation in the field of New IP, which embraces technologies that could support Drahi's goals in terms of harmonization and further efficiency gains.
So far, most of the company's statements about the sharing of capabilities across the group have appeared to relate to management expertise. In this week's press release about the Cablevision bid, Altice noted that Cablevision would be able to draw on such expertise within Suddenlink Communications , a smaller US cable operator in which Drahi agreed to buy a 70% stake earlier this year. Suddenlink could similarly benefit from the insight and experience within Cablevision. (See Altice to Buy Suddenlink in $9.1B Deal.)
Yet a streamlining of technology platforms, along with greater investment in software and virtualization products and consolidation of data center assets, might similarly please Altice's creditors and investors -- notwithstanding the additional spending this would initially entail.
Equally keen to bolster efficiency, Germany's Deutsche Telekom AG (NYSE: DT) is currently building an all-IP, highly virtualized network in central and eastern Europe that should allow the operator to close some older, country-specific facilities and adopt a more pan-regional approach. (See Deutsche Telekom Turns On Pan-European IP.)
Some financial analysts have even suggested these technologies could provide a rationale for cross-border takeover activity. The theory is that Deutsche Telekom could bulk up and expand its margins by acquiring other service providers and then cut staff and retire systems it would have needed previously. (See All-IP DT Could Drive Euro M&A, Say Analysts.)
None of this will have escaped the attention of Drahi, for whom takeover activity and efficiency are paramount concerns. Although Altice lacks the strong regional presence of a player like Deutsche Telekom, its future interests in the US, in particular, could stand to benefit from technology investments.
Assuming Drahi already owned Suddenlink, the move for Cablevision would look very much like a cross-border transaction from the perspective of a European operator. While Suddenlink's footprint covers territories such as Arkansas, Louisiana, North Carolina, Oklahoma, Texas and West Virginia, Cablevision serves the New York area.
Drahi has said that Cablevision and Suddenlink will continue to operate with "independent capital structures," but it seems highly unlikely he is not thinking about the consolidation of platforms and shared technology centers -- much as Deutsche Telekom is doing in Europe.
If the products being developed by Alcatel-Lucent and its rivals can live up to their promise, Drahi's strategy of debt-driven expansion could seem a lot more robust.
— Iain Morris, , News Editor, Light Reading