Altice International - Cleaner than expected
All,
Please find a short note post Altice International’s sale of Teads to Outbrain Inc. We will update our models after the Q2 results, which will be released on Thursday, August 29th.
Ultimately this is a better valuation and cash proceeds than we had envisaged. Valuations have always fluctuated for the Teads business, with some analysts expecting over €1.5bn. We had struck a more modest valuation, with our latest DCF valuing 100% of Teads at €777m or 6.47x FY24 EBITDA versus 7.58x implied in this transaction. But our bigger concern was that any exit would only involve a partial exit, with proceeds to be reduced accordingly. This deal exceeds our expectations, with cash proceeds of c.€682m (plus $25m deferred payment), with stock and convertible potentially increasing the value to $1bn.
Investment Rationale:
- We are a stuck record, but we are maintaining our 5% position in the subordinated bonds at the current price of c. 60%. This transaction is marginally deleveraging but with the Company reiterating its 4.0-4.5x leverage target, this sale doesn’t really change Altice International’s credit statistics.
- Underlying business should continue to deleverage, with our expectations of a further 0.5x before year-end. However, any improvement beyond the 4.0-4.5x range will result in further dividend payments to the parent.
- The trading level of Altice International is solely influenced by the perception of potential equity support to Altice France, either by further dividends to Altice Luxembourg and/or shareholder loans.
- At current levels, c.60%, we see limited downside in the sub-bonds, but due to the total mistrust between investors and Altice management, it is difficult to put any firm view on where the actual downside is. Asset coverage, in our view, is substantially greater than the current debt levels.
- If Portugal is sold, we could easily see these bonds trading back up to the high 80’s as any asset sale will be accompanied by debt repayment. The balance of debt should trade at c. 80% or 12% yield. But even without an asset sale, these should be higher and could have 10-15pts of upside to allow the bonds to trade at 15% YTM.
The Transaction:
- Outbrain, listed in the US, will acquire TEADS in a $1bn transaction, consisting of $725m of cash (€682m), $25m deferred cash, $105m convertible and 35m shares.
- Importantly, the transaction results in Altice’s pro forma share ownership of c. 42%, or 47% on a converted basis. Both of these are below 50%, which should result in Altice International no longer consolidating Teads on their balance sheet.
- The Convertible accrues dividends quarterly at 10%, but may be paid in kind. The conversion price is $10 per share, versus the current share price of c. $4.75.
- The transaction is expected to be completed in Q1 2025 and is subject to regulatory and shareholder approval at Outbrain.
- Outbrain is a significantly smaller business than TEADS, with TEADS adj EBITDA c.5.0x bigger than Outbrain. Additionally, Teads enjoys c. 36% margin versus 13% at Outbrain. Leverage, post the transaction is likely to be 3.6x at the combined group, pre synergies. (2.8x post 2yrs of synergies).
- The deal is subject to shareholder approval, with Outbrain management controlling c. 11% of the shares. Viola Ventures, an Israeli venture capital fund owns c. 13%, with Bertelsmann at 7.5%, the next biggest institutional shareholder.
Other information:
- As part of the presentation on the merger, Outbrain Inc have shared some guidance on Teads FY24 projections, which are marginally higher than we had expected. ($150-155m FY24 versus our €120m expectations).
- Altice International will host their Q2 call for debt investors on Thursday, August 29, 2024 at 14:00 CEST. Results will be released before the call, at 13:00 CEST.
In conclusion, this transaction is marginally beneficial to Altice International credit investors. The high cash component is larger than we had expected. However, the market continues to fear value leakage to SFR either via dividends or shareholder loans, it is unlikely to have a major impact.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk