While New Street Research analyst Jonathan Chaplin is bullish on Altice USA’s model to expand the margins of acquired assets, he’s not certain of the MSO’s ability to secure additional U.S. M&A targets and continue applying the strategy.
With Altice coming off a surprisingly strong U.S. initial public offering of $2.2 billion, Chaplin has rated the No. 4 American cable operator at “neutral.”
“We believe Altice will extract margins and free cash flow from their U.S. assets that are well above what we expect for peers,” Chaplin said in a note to investors today. “However, even if we give them full credit for this, we arrive at a valuation that is more expensive than peers, with lower organic growth.
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“If there is upside for Altice equity, it is from their ability to replicate the same success across additional cable assets that they acquire in the future,” Chaplin added. “Their operating model puts them in a strong position to acquire assets, but future deals are far from guaranteed; there may just not be much for sale.”
Both Altice and Charter Communications have long been tied to purchase rumors of No. 3 U.S. operator Cox Communications. But the privately held Cox insists it’s not for sale.
Smaller operators including Cable One and WideOpenWest, meanwhile, would seem to be available. But they don’t offer the same kind of transformative purchase that the nationally distributed Cox would.
“Altice may not be a bad equity, with a current business that is fairly valued, and a free option on M&A; however, we would rather own Comcast and Charter, where all of the upside we see is from organic opportunities,” Chaplin said.