Altice bites into the Big Apple: If it can make it there, it — and the cable biz — can make it anywhere


For the cable industry, there's something a little disconcerting about the Dolan family, foundational denizens of the business for 42 years, suddenly deciding that now is the time to get out.

Happily, if France's Altice, the company that just paid $17.7 billion to buy their cable operation, Cablevision (NYSE: CVC), can come through on its ambitious promise to deliver margins in the 50 percent range, it'll be a model that more than proves the health, vitality and future of the cable industry.

Altice is promising to take an operator notoriously locked in an intense battle with a telco service, Verizon FiOS (NYSE: VZ), in the majority of its footprint, and make it more profitable than cable companies with gobs more scale. For a U.S. cable industry trying to prove to investors it has a future, that strategy could change everything if it is successful.

"If they succeed in boosting Cablevision's margins to anything like the 50 percent range they have promised without wrecking the business in the process, then all cable stocks are undervalued," said MoffettNathanson analyst Craig Moffett. "Comcast and Charter should both rally on this prospect alone."

Altice faces a significant challenge though. As Moffett points out, Cablevision has experienced accelerating video subscriber declines in markets like Brooklyn and the Bronx as Verizon's FiOS has expanded into its footprint. Altice is going to need to make up for this revenue shortfall by growing revenue on the broadband side of the business -- but subscriber counts aren't growing explosively there, either.

That will leave Cablevision in the unenviable position, Moffett said, of potentially having to raise prices. 

"Verizon's FiOS brand managers must be licking their chops," the analyst said.

Of course, approaching the U.S. cable industry with fresh eyes might be the ace in the hole for Altice chief Patrick Drahi, who pledged yesterday to bring "U.S. ARPU to Europe, and European cost structure to the U.S."

Speaking at the Goldman Sachs Communicopia conference just hours after Altice and Cablevision announced their purchase agreement, Drahi notably told investors that "no one in our company is making more than a couple hundred thousand a year."

To put the salience of this comment in context, Drahi is buying a company whose boardroom recently fended off investor complaints about the Dolan family collectively getting paid more than $100 million a year.

Addressing Cablevision's competition with Verizon, Drahi added, "FiOS is my broadband competitor; it's the same tech. Bankers told me Cablevision is no good because it has this competition. But it is good."

Analysts like Moffett may not yet fathom Drahi's plan; indeed, Moffett called Cablevision "unaquireable" in June due to Verizon's FiOS threat. But some of Moffett's peers are strong believers in the broader future of the cable business: "We have been recommending the cable sector on the basis that investors are underestimating the long-term free cash flow of the business and the sector trades too cheap relative to other infrastructure assets globally," said NewStreet Research's Jonathan Chaplin, signing off on the deal in a note to investors.

For his part, Drahi called the combined sum of the U.S. cable assets he's purchased so far -- Suddenlink Communications and Cablevision -- a "small fish." He said he is going to keep buying U.S. cable operators to build more heft and scale. 

However, there are only a few mid-sized fish -- Mediacom and Cable One -- remaining in the market. (Privately held Cox Communications has said it's not for sale, and analysts seem to be taking it at its word.)

"There isn't much left to do in Cableland," Moffett said. "Rolling up a whole string of small operators might be possible. But it would be awfully hard (the billing system integrations alone would be a nightmare)."

But "it can't simply be the case that Altice is 'done,'" Moffett added, noting Altice might pursue a wireless company like T-Mobile US (NYSE:TMUS).

"Altice has a self-professed affinity for the quad play, so such a move can't be ruled out," Moffett said. "But the logic of attaching a national wireless operator to a cable conglomerate that in aggregate covers just 5 percent of the country seems, well, awfully thin."

During his Communicopia appearance, Drahi acknowledged he might pursue a wireless company in the United States, but said he wouldn't be doing that anytime soon.

Indeed, while Cablevision provided a predictable next step for Altice after it exploded on the U.S. telecom scene last spring with its $9.1 billion Suddenlink purchase, it's anyone's guess where it goes from here. --Daniel

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