While they may have initially dismissed Altice’s core strategy of higher EBITDA margins, reduced capital intensity and growth through perpetual M&A, skepticism among investors and cable-industry executives is eroding, according to New Street Research analyst Charlie Gaynor.
“We would wager that skepticism will erode further during the full court press of the IPO roadshow,” Gaynor added. Altice’s team, he said, “is confident and, we think, persuasive.”
And although investors may be wary of giving Altice too much credit for meeting their cost and capital intensity targets until they actually prove they can achieve and maintain them, “they will also be asking Comcast and Charter why they can't capture similar efficiencies.”
New Street indicated bullishness on Altice’s margins.
While purchasing Suddenlink Communications and Cablevision, Altice laid out a plan to achieve margins in the mid-40% range in the near term. “We think the management team will articulate opportunities to expand margins further longer term,” Gaynor said, “particularly once they have completed the fiber-to-the-home deployment.”
In regard to capex, meanwhile, New Street doesn’t see too much of a reduction from the current annual level of $1.35 billion for the next 5 years, as Altice builds out its FTTH plan. But capex will fall significantly thereafter, Gaynor pointed out.
“Management has said that maintenance capex should be under $500 million, or just 5% of revenue, when the project is complete,” he wrote. “If management can take future capital intensity to the level they expect, there is further upside to our target.”
As for the third prong of Altice’s strategy, M&A, New Street expects the company to keep right on buying companies. “We expect their focus to be entirely on cable assets for the next few years and everything eventually … except maybe for Comcast,” Gaynor said. “This is a team that sees their core competency as running infrastructure assets better than anyone else. At some point, wireless, other fiber assets and even telco wireline assets will all be fair game, but only after they have exhausted their opportunities with cable. We haven't assumed any upside from M&A in our valuation; if they can acquire more assets at decent prices, it would all be upside.”
As Altice moves forward with its U.S. agenda, Gaynor predicts the Nos. 1 and 2 cable companies will fall under its influence.
“We think margins will become a focus for Comcast and Charter in the next few quarters,” Gaynor wrote. “We also think Comcast and Charter stand to benefit from M&A. In fact, we think the two should attempt a deal and we think the odds of approval are much better than many realize.”