Altice has 'lofty synergy expectations' for Cablevision buy, says it will beat Comcast on margins

Following up its $9.1 billion purchase of Suddenlink Communications in May with a $17.7 billion-plus-debt acquisition of Cablevision (NYSE: CVC), French telecom conglomerate Altice SA has "lofty synergy expectations for its combined collection of U.S. cable assets," analysts say.

"We are surprised by the synergy expectations from the transaction as the $900 million in [projected] operating expense savings represents approximately 20 percent of the cable and LightPath operating expenses and more than a third of non-content operating expenses," said Jefferies analyst Mike McCormack in a note sent to investors this morning. 

"The majority of the cost savings come from the elimination of overhead, process simplification, network improvements and some synergies with Suddenlink," McCormack added. "These cost savings imply a nearly 47 percent margin profile, superior to any U.S. cable operator, even those with materially higher scale and more benign competitive environments." 

The analysts at MoffettNathanson predicted that Altice will embark on major cost-cutting at Cablevision to hit those synergy targets. "Cost reductions like those won't just mean cutting SG&A. It will mean slashing customer service; repair and maintenance, and sales and marketing (specifically, channel mix optimization, and back-office upgrades). It's hard not to imagine that that might have at least some impact on market share."

Added the analysts at MoffettNathanson: "To offset that kind of loss of video revenues, Altice will need to grow broadband revenues dramatically. Unfortunately, Cablevision's broadband subscriber base isn't growing. So Altice will need to raise prices. A lot. Verizon's FiOS brand managers must be licking their chops."

Evercore's Vijay Jayant also wondered if the combined Suddenlink-Cablevision asset can match the margin potential of much bigger U.S. cable conglomerates. If and when the transaction closes -- which is expected to occur in the first half of 2016 -- the combined company will be only the fourth biggest U.S. cable operator with 3.74 million video subscribers, trailing Comcast (NASDAQ: CMCSA), the combined Charter Communications (NASDAQ: CHTR), Time Warner Cable (NYSE: TWC) and Bright House Networks, and Cox Communications.  

"Altice's expertise in improving efficiencies has shown some success in its European assets," Jayant said. "Management there believes they can improve margins on their relatively small U.S. assets at levels higher than the industry leader Comcast. It will be interesting to see if such margins are sustainable without impacting the terminal value."

"Altice is betting that they can cut $900MM in opex at CVC by running the business more efficiently. If we exclude programming, franchise and other regulatory costs this amounts to about 48% of remaining cash opex or about $15 per home passed," noted the analysts at New Street Research in reaction to Altice's deal for Cablevision. "When we compare CVC to the rest of the industry, costs do seem high; however, Altice is targeting a cost per home passed that is well below where other MSO's are (25% below CMCSA today). If Altice is indeed successful and other MSOs are able to follow their lead, there is fairly meaningful upside to margins across the group."

Cablevision stock was up more than 15 percent in midday trading on the Nasdaq following the Altice acquisition announcement. In fact, Cablevision's shares are up more than 51 percent since May 19, the day before Altice exploded onto the U.S. cable scene with its Suddenlink buyout announcement and kickstarted rumors that Cablevision would be its next target. 

For his part, Cablevision CEO James Dolan had made no secret that his company was looking for an acquisition suitor. In fact, sitting next to Rob Marcus at an INTX industry trade show panel in May, he asked his TWC counterpart to buy his company, point blank, in front of an auditorium full of stunned onlookers.

"We are very excited about our acquisition of Cablevision, which has developed into a pre-eminent cable operator under the steady, long-term ownership of the Dolan Family," Altice CEO Dexter Goei said in a statement. "This acquisition, our second in the cable sector in the U.S., is the next step in Altice's long-term oriented strategy in the U.S., one of the largest and fastest growing communications markets in the world."

Undoubtedly, speculation will begin that Altice will continue its shopping spree with yet another U.S. cable asset -- shares for Phoenix, Ariz.-based mid-sized operator Cable One are up nearly 3 percent today in midday trading, for example. New York-based Mediacom could be another target. 

As for the Dolan family, which started Cablevision back in 1973, they're finally out of the cable business.

"For the Dolan family, we move forward with AMC Networks and The Madison Square Garden Company -- two and, eventually, three public companies -- all born of Cablevision and each with brighter prospects today than ever before," Cablevision CEO James Dolan said.

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