On Saturday, we heard from the giant French media and entertainment company Vivendi that its Supervisory Board had approved the acquisition of its SFR mobile telephony subsidiary by Patrick Drahi’s Altice group, via a merger with its French publicly listed cable affiliate Numericable Group.
The pending deal will create a major force in fixed/mobile telephony in France, with the declared aim, amongst other things, of helping to speed the convergence of the two and to speed the introduction of very high speed 4G internet connections nationwide in France.
Well today we heard Altice itself confirm the deal as well, after presumably spending the weekend tidying up some of the loose ends of the transaction, ;perhaps on the financing side.
First, Altice today welcomed the unanimous decision by Vivendi’s Supervisory Board in favor of the offer by Altice/Numericable.
Then, second, Patrick Drahi, the Altice Chairman, its controlling shareholder, and the driving force behind the acquisition himself commented, “Our industrial project is ambitious and growth-oriented. By bringing together SFR and Numericable we will create the French champion in very high speed broadband and in the convergence of fixed and mobile networks. This is a trend throughout the sector, borne out across Europe and around the world.”
Finally, he concluded, “Our project, which is founded upon perfectly complementary networks and skillsets, will generate strong growth, which in turn will create jobs and stimulate investment. The future begins today.”
One of the small puzzles behind the Vivendi announcement is also now resolved by Altice today when they confirmed that Altice will now hold 60% of the combined SFR/Numericable entity moving forward. Until very recently Altice has held just 40% of Numericable. Now we learn that prior to the merger itself two additional things will happen with respect to the Altice percentage holding in Numericable.
First two private equity firms, New York based Carlyle Group (21.32%) and London based Cinven (13.27%), who together currently hold 34.6% of the Numericable shares, will now immediately sell these shares to Altice itself. They will do so by taking back some cash, about US$725 million (Euros 529 million) and, just as important, some shares in publicly listed Altice as well, about US$1 billion worth (Euros 778 million), to avoid over-leveraging the Altice ship.
Then, second, Numericable will hold a US$6.5 billion (Euros 4.7 billion) rights offering of its own shares, to which Altice will subscribe for its full new 74.5% (i.e. still pre-merger with SFR) share. This will then avoid over-leveraging the Numericable balance sheet.
Altice will finance its own share of the rights offering from a US$5.6 billion (Euros 4.2 billion) covenant only, i.e. unsecured, debt package on its balance sheet, with an average life of at least 7 years, from its banking syndicate. Altice may also implement a small capital increase as well of up to about US$750 million (Euros 550 million).
Then when the merger of Numericable with SFR is finally consummated Altice will become diluted down to the proposed 60% position, leaving Vivendi with 20% as well, as part of its payment consideration, and the outstanding publicly listed free float will be 20%.
After Vivendi has been paid its initial cash of US$18.5 billion (Euros 13.5 billion) to give up SFR, when the dust settles Numericable will also have its own covenant only, i.e. unsecured, debt package of US$15.9 billion (Euros 11.6 billion) on its own balance sheet, with an average life of at least 7 years, from an underwritten banking syndicate.
At the end of the day these are still substantially leveraged transactions, which in the cable and mobile phone world have historically been acceptable. Given the recent acceleration of competition that has been taking place however in these industries, and the impact this has had, and likely may still have moving forward, on pricing, and therefore also on the magic words “sustainable projected EBITDA”, the degree of what is considered safe leverage has become more constrained, and is being continually redefined.
Even so, Altice are stating firmly that the price they are paying for this transaction values SFR at just 6.5 times estimated 2014 EBITDA before any merger synergies, and even less, at just 5.0 times estimated 2014 EBITDA, after such estimated expected post-merger operating synergies.
If these are realistic they should therefore be in fairly safe waters, though moving forward beyond 2014 will require they have churn under control and therefore lots of satisfied customers.
For those not schooled in financial jargon, which is really most of us, EBITDA is a term of art that stands for earnings before deducting interest, taxes, depreciation and amortization. As a metric this can sometimes be a useful guide to the cash flow potential of a business before looking at its capital expenditure needs.
Churn is another separate, but actually also rather important, piece of telecoms industry jargon. Estimates of churn generally refer to the propensity of a media company to see rapid turnover of its customer base, particularly in cases where it is competing solely on price without otherwise any particular emphasis on customer satisfaction, and therefore long term customer loyalty.