Altice SFR - How times have changed.
All,
Please find our updated analysis post FY23 results here.
How the world has changed since September. The Company have struck a more aggressive tone suggesting deleveraging from creditor participation in discounted transactions. Ultimately the level of aggression from Drahi/Company depends on the ability to move the unrestricted cash out of the Group. Bondholders have formed groups together, and although we don’t envisage any negotiations in the short term (prior to further asset sales at SFR and potentially at Altice International) the parameters have been drawn. The ball is still in the Company’s hands but the FY23 call has brought investors back to the reality of the over leveraged state Altice SFR are in.
Investment Rationale:
- We have previously avoided taking a position in Altice SFR favouring the risk reward at Altice International. We still maintain the view that the risk profile at Altice International, even in the subs, is preferential to the Altice SFR structure.
- However, we feel the time is coming closer to getting involved in Altice SFR. We are not taking a position at this moment in time, as further discussion is required amongst the team.
What are the Options?
- We view the main determining factor in deciding on the options available to the Company and its creditors is whether the sale proceeds of the unrestricted subsidiaries can be passed up to the ultimate shareholder. This has to be a viable threat to creditors in order for creditors, both senior and subordinate, to partake in discounted transactions in order to achieve meaningful deleveraging.
Scenario 1: Cash can be moved out to shareholders:
- Under this scenario, Drahi/Company are in a relatively strong position, giving the Company c. €4bn+ of “fresh equity” to reinvest into the Company in any negotiations, either inside or outside a court process. The fact that the cash is outside the Group in this scenario is likely to make the senior holders more willing to “lock-up” with Drahi in any restructuring in return for a substantial pay down.
- The sub bond holders would be in a (more) weaker position, with the ability to “credit bid” the Company under a Sauvegarde procedure more unlikely. The amount of cash required increases and the ability to gain agreement with the senior holders will be diminished.
Scenario 2: Cash can NOT be moved out of the structure:
- Nearly goes without saying, this scenario is definitely favours the creditors. However, it does open up the opportunity for the Company to pit creditors against each other. There is no restriction on which creditors would be paid down with the cash proceeds, and we can envisage that the Company will offer differing proposals to each creditor group.
- Option 2A: The Company offering senior creditors the vast majority of the cash proceeds from asset sales of Altice SFR (assumed to be €4bn, which includes Data Centres, Altice Média and XPFibre) for debt repayment if they agree to lock-up with shareholders under any court proceedings. This would leave the senior debt at c. €14-16bn of debt, depending on levels of haircuts versus debt extensions.
- This would be extremely negative for the sub holders who would find it difficult to credit bid the whole Company (as under this scenario the senior creditors are locked up). The shareholders have the potential to insert new genuine fresh equity from any asset sales at Altice International, which could be c.€1-1.5bn in proceeds. This would equate to 25-30c recovery for Altice SFR subs.
- Option 2B: To make the senior holders comply with option 2A, (and depending on how aggressive the Company wishes to be, it may wish to impose a 10c haircut or no haircut with extension), the alternative is no fresh equity is injected and the sale proceeds from Altice SFR asset sales would be used to pay down (at a discounted levels) both senior and sub bonds. Under this proposal, Senior and Sub holders would be vying for their share of the €4bn of asset sale proceeds. However, this scenario is a very aggressive stance and leaves the risk that the shareholders would lose control in any court proceedings. (i.e. sub and senior holders work together and credit bid the Company).
What are the risks that Scenario 2 doesn’t happen?
- Firstly, for Scenario 2A to happen, Drahi has to invest genuine fresh equity in order to deal with the sub bond holders. It is not clear if this is possible or if some of these proceeds from Altice International need to be used to deal with borrowings at some of the other holding companies, including Altice UK (BT stake).
- Scenario 2A is not very aggressive and the end leverage does still remain above 4.0x. Drahi/shareholders may seek more deleveraging from either more debt forgiveness from Senior holders (making a lock-up more difficult) or dealing with the sub holders via a court procedure and stating that the sub holders are totally out of the momey.
- But the most obvious restriction on this scenario is the requirement that further asset sales are required. Rumour persist that both XPFibre (part of SFR, but unrestricted) and Altice Portugal (the source of “real fresh equity”) are close to conclusion but risks remain. As we seen with the sale of the Data Centre assets, initial rumours was c. €1bn but actual cash proceeds will end up closer to €500m!
- Although the Company is currently over-leveraged, there is no immediate meaningful maturity for the Company to deal with. It is in the interests of the Company to deal with the overall structure holistically and not just pay down the front end at par, but the Company have time on their hands. We don’t expect any immediate movement and further asset sales are likely to emerge before the Company engages with its creditors.
Recent Trading
- The headlines have all ignored recent trading and guidance but it is proper we start our analysis here. Telecom business declined 0.2% for the quarter, but driven by continued weakness in the residential services business (-2.1%). This was driven by lower subscriber numbers with lower gross additions. Although the fixed service revenue continues to decline the pace of decline has moderated.
- The reduction in net adds appear to be driven by a lack of promotional activity, as actions over the year to reduce the promotional period to 6 months from 12 months has resulted in a more stabilised ARPU levels but less gross adds.
- Further reducing EBITDA levels is the lower construction levels. The expansion phase of XPFibre is coming to an end. This has resulted in EBITDA declining by 1% in the quarter, and 3% for the FY23. The 1% decline in EBITDA is more muted than the annual figure due to lower operating costs, namely lower content costs.
Guidance:
- Revenue: Due to the lower construction activity, and the competitive environment in the residential market, specifically mobile division, Altice management are guiding for a decline for FY24 revenue versus prior years.
- EBITDA: Overall a reduction of mid-single digit levels. Driven by a couple of factors including obviously the lower revenue numbers. Secondly, the transition of customers to FTTH comes with additional cost, and especially in regions where Altice do not own the infrastructure (higher rents). Unlike other European countries, French consumers are not operating under inflation-linked contracts, so there is no natural pass through of recent inflationary cost increases.
- Cashflow: Lower than prior years, due to lower EBITDA and higher interest costs. Management expect lower CAPEX levels versus prior years, but this is not sufficient to compensate for the higher interest costs.
How to deleverage:
- The sale of the Data centres and the planned sale of Altice Media are part of the inorganic transactions pursued by management in order to deleverage the balance sheet. However, both of these have been designated as unrestricted subsidiaries and the Company will continue to evaluate the value-maximising use of these proceeds in order to achieve some deleveraging. Management continued stating they are unlikely to move forward on potential deleveraging actions than only provide partial solution for the capital structure. Existing unrestricted assets and other sources of funds will only be contributed to deleveraging efforts to the extent the return on such contributions is appropriate.
- It is important to note that these comments were made as part of managements’ prepared comments on the call.
- Although during the Q&A, management talked about achieving below 4.0x leverage via creditor participation in discounted transactions, which could include exchange offers or tenders or repurchases, the prepared comments do state that they will seek to use the proceeds for deleveraging. Although it is possible for the unrestricted assets/ proceeds to be leaked out of the Company, the initial focus of management is to use these and other proceeds in a holistic manner to deleverage the Company.
Various Bondholder Groups:
- In response to the “requirement” of creditor participation in discounted transactions, there appears to be two distinct bondholder groups. First one, led by legal firm Gibson Dunn, appears to be mainly focused on Senior Secured borrowers, and has approximately 50% of outstanding debt. This Group has not yet appointed Financial advisers with three FAs rumoured to be pitching for the business on Wednesday (27th).
- The other Group, reported led by Attestor and Arini, are more evenly split between Senior and Subordinated bondholders and have appointed Houlihan Lokey and Milbank as advisers.
- The main focus of both bondholder groups is to ensure Directors are reminded of their fiduciary duty and to ensure that cash proceeds from the sale of unrestricted subsidiaries is not used to fund a dividend and used instead for debt repayment. How and it what format this is used is still up for discussion.
Next Stages:
- The next event is likely to be Q1 results. This may or may not coincide with an update on the sale of other subsidiaries not part of the restricted group - namely XPFibre. The results themselves are likely to be underwhelming.
- It is worth reiterating the point raised by management that the Company are unlikely to move forward on any transactions that only offer a partial solution. I.e. any transaction is going to be holistic. This will require further asset sales in order for Drahi/Company to have all available resources before commencing any transaction.
- A sale of assets at Altice International, namely Altice Portugal, may also have happened prior to any proposals from the Company.
- Therefore, we suspect in the short term, without notice of a transaction, the Company communication will focus on the underlying performance and its relative decline versus the prior year.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk