Charter Communications Inc. has long been a “natural buyer” for Altice USA Inc., according to a Wolfe Research analyst. But could a deal actually happen?
ATICE ATUS
Investors appear to be bullish, with the stock posting gains of more than 60% over two days in the wake of a Bloomberg News report saying CHTR,
It is working with financial advisors to consider a potential merger. Charter stock fell about 3% over the same period.
Charter is the top cable operator in New York City, according to Wolfe Research, while Altice serves about 6 million homes in the New York region and the broader Northeast.
Spokespeople for Altice and Charter said they do not comment on rumours.
Any deal announcement would arrive during difficult times for the cable industry. Shares of Spectrum-parent Charter suffered their worst single-day drop on record earlier this month after the company's latest earnings report revealed a decline in the number of broadband subscribers. Cable companies face increasing competition from wireless carriers that have strengthened their offerings in the U.S. Internet market.
Meanwhile, Optimum's parent company, Altice, also saw net broadband losses last quarter, with a MoffettNathanson analyst commenting at the time that the company faces an “insurmountable leverage wall in 2027.”
'Terrible timing'
Charter's stock is down roughly 20% since the company's last earnings report, noted Bernstein analyst Laurent Yoon, so, in that sense, the company's potential interest in a deal seems like “terrible timing.”
“But again, these challenges, the growth of broadband in particular, and the potential operational synergies to generate additional cash flows (eventually) may be why they weigh the potential benefits of the deal,” he continued.
Yoon does not see capital spending synergies if the two companies merge, but adds that there could be “potential operational synergies in key markets as both CHTR and ATUS operate in adjacent markets with little or no overlap today.”
Moreover, Charter will likely be able to refinance Altice's $25 billion debt at lower rates. But the deal would likely raise Charter's leverage ratio to 4.7 times, above its target of 4.5 times, per Yuon.
“A large debt-financed acquisition could hurt credit measures,” a Gimme Credit analyst wrote on Tuesday, while downgrading its rating to worsen from improve.
“A set of challenges”
Analysts noted that the report raised various questions. To start, would Charter really consider a deal, and would it sell Altice – and what price would make sense?
“While investors appreciate when calculations work out, CHTR faces a set of challenges it needs to overcome in the near term,” Yoon wrote. “In addition, taking on $25 billion in additional debt does not bode well when investors wonder what risks they are taking.” [earnings before interest, taxes, depreciation and amortization]“And near-term cash flow.
This is especially true given the likelihood of increased capital expenditures over at least the next three years.
As for Altice, Wolfe's Peter Supino notes that the saga gains an extra dimension from the fact that billionaire Patrick Drahi controls the company and wouldn't necessarily be pressured to make a quick sale. At the same time, Supino said, the clock is ticking given that Altice has about $25 billion in debt along with $3.5 billion in “declining” earnings before interest, taxes, depreciation and amortization (Ebitda).
“While Altice USA's liberal debt covenants buy time, the approximately $12 billion in debt due through 2028 ($7 billion in 2027) will ultimately kill Drahi stock,” he wrote.
See also: Charter stock takes another downgrade with weak, 'hard to interpret' numbers
