Some deals are just so punchy that they make you worry. Altice’s $17.7 billion acquisition of Cablevision seems to have all the right ingredients. The ambition of the Netherlands-domiciled telecommunications company is quite breathtaking – it has spent more than $50 billion on acquisitions in the last 18 months.
|Patrick Drahi, Altice|
When Altice and Numericable bought French mobile phone operator SFR from Vivendi last year, it was financed by the largest high-yield bond ever, when $16.7 billion of bonds were issued: $10.9 billion by Numericable and $5.8 billion equivalent by Altice.
Altice paid a further $3.9 billion to acquire the balance of Vivendi’s stake in SFR in February this year. It also splashed out $7.4 billion for Portugal Telecom in June, shortly after making its first foray into the US with the $9.1 billion purchase of cable firm Suddenlink from BC Partners and the Canadian Pension Plan Investment Board.
That deal had already triggered rumblings of disquiet in the high yield debt markets, involving as it did $5 billion of existing and $1.7 billion of new debt. But when Altice stunned the market with its Cablevision deal in September, the debt markets – for so long so receptive to TMT issuers – baulked at the numbers involved.
Altice had originally planned to issue a $6.3 billion high yield bond as part of the $14.5 billion new and existing debt that the deal requires. Subsequently it had to downsize the bond issue by $1 billion to $5.3 billion and increase the yield on offer to more than 10%.
It counterbalanced this by increasing the acquisition loan. In late September Altice issued $8.6 billion of new debt made up of a $3.8 billion seven-year term loan B, a $1 billion senior guaranteed note and a further $3.8 billion in seven- and 10-year senior unsecured paper. The average cost of the new debt is 7.6%.
The bonds and loans were swiftly followed by a €1.61 billion accelerated bookbuild to partly fund Altice’s $3.3 billion cash portion of the deal on October 1. Cablevisions’ stock fell by 24% to September 30 after the deal was announced, so it was into this environment that the company had to launch the equity capital raising. The A and B shares were priced at discounts of 9.2% and 14.9% respectively and both fell after launch. Altice’s own shares dropped by 40% from early August to October 1.
This spending spree is the result of the extremely accommodating conditions in the high-yield debt markets that are fuelling jumbo acquisition deals in the technology sector: Dell’s recently announced takeover of data storage provider EMC could see the former issue between $10 billion and $15 billion high yield bonds.
Cheap debt has, however, enabled Altice to pay a 66% premium to the Cablevision share price in a deal that pushes leverage to 7.8 times. It has also enabled Numericable-SFR (now 78% owned by Altice) to issue €1.6 billion of new debt to fund a €2.5 billion dividend recap.
Altice’s capital structure is both overcomplicated and overleveraged. The firm is also exploiting the surfeit of liquidity in the capital markets to exhibit some of the more egregious elements of corporate behaviour.
Debt investors don’t like it: Cablevision’s 5.875% notes due September 2022 were trading at 78.9 cents on the dollar on September 22 after having been close to par at the start of the month.
The debt markets may only have themselves to blame, but Drahi would do well to pay heed.