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In France, Entrepreneur Drahi Follows Malone's Cable Path


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In France, Entrepreneur Drahi Follows Malone's Cable Path

 

Acquisition of Vivendi's SFR Would Further Industry's European Consolidation

 

PARIS—When Patrick Drahi was preparing a series of deals to buy up France's fragmented array of cable-television operators a decade ago, he told partners he wanted to follow in some powerful footsteps: those of U.S. cable magnate John Malone.

 

"If there's one entrepreneur I really admire for what he's built up, it's him," Mr. Drahi said at the time, according to a person close to Mr. Drahi. "This is really my dream."

 

The 50-year-old Franco-Israeli billionaire took a big step in that direction on Friday, entering exclusive negotiations with Vivendi SA to buy its telecommunications company SFR in a leveraged buyout that includes €11.75 billion ($16.35 billion) in cash.

 

The move made Mr. Drahi one of the most visible entrepreneurs in France and elbowed out another French billionaire, Martin Bouygues, chief executive of one of France's most prominent family-controlled companies, Bouygues SA. Mr. Bouygues lobbied hard for a deal that many analysts considered crucial to the survival of his telecom unit.

 

Mr. Drahi's pursuit of SFR is the latest sign of a broad consolidation trend rippling through Europe. The wave has been led in part by Mr. Malone's Liberty Global PLC, which has snapped up a dozen cable operators in Europe, agreeing to deals in both the Netherlands and the U.K. during the past year.

 

Mr. Drahi, whose investment vehicle Altice SA (ATC.AE) is registered in Luxembourg (but listed in Amsterdam), has until now cut a low profile in France, quietly pushing through a series of acquisitions from Israel to Belgium to Portugal in an effort to build his own European telecom empire. Now he says his plan is to pursue more deals. "Cable is the future but the real future is the convergence of mobile and fixed-line communications," Mr. Drahi told a news conference on Monday. "We are not inventing something here. It is happening everywhere around us..."

 

http://online.wsj.com/news/articles/SB10001424052702303287804579445534120529264

 

 

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Here's some more about Patrick Drahi and Altice SA (ATC.AE).

 

 

His Forbes profile:

 

Patrick Drahi joins the Forbes Billionaires list this year after Altice, the multinational telecommunications company he founded, raised $1.8 billion in a January 2014 Amsterdam IPO. Following a buy-low, sell high mantra, he built Altice through 20 acquisitions of lagging cable and mobile operators, often at knockdown prices in places like France, Belgium, Israel, Portugal, and the Dominican Republic.

More than 40% of Altice's revenues comes from France while 27% comes from Israel. The son of two math teachers, he was born in Morocco and lived there for 15 years.

He holds an engineering degree from the prestigious Parisian university École Polytechnique and lives in Geneva with his wife and four children.

 

 

Bloomberg TV: An interview he gave after the IPO where he talks about Altice and his views on cable -

 

Reuters: An interesting write-up on his career so far and Altice's recent bid for SFR -

http://www.reuters.com/article/2014/03/14/us-vivendi-sfr-numericable-drahi-idUSBREA2D1LJ20140314

 

Fierce Wireless: Various links that highlight his Malone-inspired approach to deals -

http://www.fiercewireless.com/europe/tags/patrick-drahi

 

The Economist: French Telecom Wars -

http://www.economist.com/blogs/schumpeter/2014/03/french-telecoms-wars-0

Bloomberg: An article about financing and leverage for the SFR bid -

http://www.bloomberg.com/news/2014-03-17/drahi-said-to-plan-19-5-billion-financing-for-sfr-buyout-offer.html

 

Altice SA Webcast: Investor call, slide presentation and Q&A for full year 2013 results -

http://edge.media-server.com/m/p/piot6f5e/lan/en

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Drahi continues to follow in the path of Malone with attractive deals.. Since the IPO of Altice SA in January 2014, the shares have risen from 25e/share to 85e/share today. Drahi comes across as extremely humble, intelligent and thoughtful. I would like to partner with this entrepreneur if given a good entry price.

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So Fixed mobile convergence is the same thing that Republic Wireless is doing and what Google wants to do with a mobile service.  How much residential/commercial density is need to to make FMC really economic?

 

Found a Cisco whitepaper on the subject.

 

http://www.cisco.com/c/en/us/solutions/collateral/service-provider/fixed-mobile-convergence/white_paper_c11-480811.html

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Altice’s savvy ‘playbook’ fuels rapid growth at telecoms group

 

http://www.ft.com/intl/cms/s/0/5cf6cd60-bc18-11e4-b6ec-00144feab7de.html#axzz3TSsVJzp6

 

"Apart from a Nespresso machine, there are few frills at Altice’s office in Geneva. Jeans and open-necked shirts are the standard dress code and easyJet is the airline of choice for the 15 staff members of the Amsterdam-listed, Luxembourg-registered telecoms group.

 

“These guys don’t even have secretaries,” says one investment banker.

 

If Altice were a struggling start-up, this would seem perfectly normal. But in the past 12 months, the group has put up €28bn to transform itself from a relatively small-scale cable group into one of the continent’s leading telecoms operators that oversees 35,000 employees.

 

The pace of expansion has wowed investors: since its initial public offering just over a year ago, Altice’s share price has risen 197 per cent, giving it a stock market capitalisation of more than €20.5bn.

 

The company’s rapid growth — recent acquisitions include Portugal Telecom and a controlling stake in SFR, France’s second-largest mobile operator — has led some analysts to wonder how far the group can go.

 

In just over a decade, the business set up by Franco-Israeli billionaire Patrick Drahi has evolved from a project to roll up French cable assets into a burgeoning media empire. And Altice has no intention of stopping.

 

“It’s not that we sit down with a map every day, but we are very open to a lot of projects and we go very fast,” says Dennis Okhuijsen, chief financial officer.

 

Altice is a holding group that draws on the experience of Mr Drahi and his team in the cable sector. Many of them honed their skills either as an employee or a banker to Liberty Global, the world’s biggest cable company. Mr Drahi sold a regional French business to John Malone, founder of Liberty Global, in 1999.

 

Like Liberty Global, Altice relies on its savvy use of capital markets to fund its growth. Mr Okhuijsen, for example, used to be treasurer at Liberty Global. While there, he built a stable of relationships with leading banks and learnt how to use debt and equity issuance to minimise costs. [...] "

Altice_vs_Liberty_global.jpg.d83a03776bfef25ed9d2680d4867fb83.jpg

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I think that in the future cable will be worth a lot less than it is now. So I think using tonnes of cheap debt to buy up overpriced cable companies is basically like pressing the accelerator on a car when you know you are heading towards a dead-end. I don't think its smart.

 

Maybe we are all a little too impressed by  John Malone. He was pretty good at getting companies to overpay for acquiring his rolled-up cable assets. That trick might not work in the future.

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I think that in the future cable will be worth a lot less than it is now. So I think using tonnes of cheap debt to buy up overpriced cable companies is basically like pressing the accelerator on a car when you know you are heading towards a dead-end. I don't think its smart.

 

Maybe we are all a little too impressed by  John Malone. He was pretty good at getting companies to overpay for acquiring his rolled-up cable assets. That trick might not work in the future.

 

Why do you think it will be worth a lot less than it is now?

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Why do you think it will be worth a lot less than it is now?

 

Because I think cable companies are going to turn into utilities. Dumb pipes. Consumers are not going to pay a lot for dumb pipes. And regulators won't let them extract wealth from content providers. For example, John Malone used to use TCI monopoly power to extract equity stakes in various television networks like BET. But how are you supposed to do that now when regulators are pushing concepts like Net Neutrality.

 

The internet is what is driving this. On top of this I also think John Malone made the cable industry seem much better than it really is. He pushed analysts to focus on cash flow which makes little sense for cable companies where depreciation is a huge cost. He somehow got acquirers to buy his cable networks for much more than they were worth. And he exhorted a lot of upside from emerging cable networks when TCI was the only game in town. All those games are going to be much harder in the current environment that they were in the past.

 

Maybe I'm wrong but I feel that a lot of people are essentially extrapolating what John Malone did in the past to the present. I know I was. Thus they look at someone like  Drahi and all they see is John Malone. And I think that is a mistake.

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Why do you think it will be worth a lot less than it is now?

 

Because I think cable companies are going to turn into utilities. Dumb pipes. Consumers are not going to pay a lot for dumb pipes. And regulators won't let them extract wealth from content providers. For example, John Malone used to use TCI monopoly power to extract equity stakes in various television networks like BET. But how are you supposed to do that now when regulators are pushing concepts like Net Neutrality.

 

The internet is what is driving this. On top of this I also think John Malone made the cable industry seem much better than it really is. He pushed analysts to focus on cash flow which makes little sense for cable companies where depreciation is a huge cost. He somehow got acquirers to buy his cable networks for much more than they were worth. And he exhorted a lot of upside from emerging cable networks when TCI was the only game in town. All those games are going to be much harder in the current environment that they were in the past.

 

Maybe I'm wrong but I feel that a lot of people are essentially extrapolating what John Malone did in the past to the present. I know I was. Thus they look at someone like  Drahi and all they see is John Malone. And I think that is a mistake.

 

Thanks for explaining your point of view.

 

Saying that cable won't be as profitable because of net neutrality and the "dump pipe" effect implies that it is a good business right now because they are non-neutral on internet content or whatever. I don't think that's the case.

 

Europe has a friendlier regulatory environment to cable than the US, mostly because there's more competition and regulators have seen cable companies invest heavily in taking speeds up, but even in the US where the FCC recently went a lot farther than many even expected, they are not touching rates. If they had capped rates and how much pricing cable could take, maybe that would be a problem, but I doubt that regulators want to risk making a big piece of the US internet infrastructure uncompetitive.

 

Cable companies aren't making much right now by charging some companies more for faster lanes or whatever, so if they are barred from doing that at all, it won't change much.

 

As for dumb pipes, I don't know. What's the opposite of a dumb pipe in this scenario?

 

I think video might lose a bit of ground, though the switch to all-digital is allowing cable to compete with satellite (the huge growth that nationwide DBS operators had took place in a certain context that is changing) and frees up a lot of bandwidth for broadband without new capex on that side, and broadband is making up for losses in video and can potentially be very profitable over the cycle because most of the revenue doesn't go to content producers the way most of the video bill does. Also, the ability to do triple and quad play reduces churn a lot, which is one of the main things for profitability; competitors mostly can't offer 3-4 play. And OTT video might compete with the video bundle, but it makes broadband more attractive.

 

Depreciation is a real cost, which is why free cash flow, which takes into account maintenance capex, is the right measure. But when Malone argued for the switch to EBITDA, it made a lot more sense than GAAP earnings (which is what people were looking at for cable companies at the time), because optimizing for GAAP meant paying a lot of taxes and growing a lot slower through acquisition at a time when consolidation made sense.

 

Separating the underlying economics from the capital structure for analysis isn't a bad idea, because it's a lot easier to change the capital structure than the underlying business. You just have to make sure you aren't fooling yourself about what you're looking at.

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Guest JoelS

"Separately, Altice is eyeing Time Warner Cable Inc., the No. 2 U.S. cable operator by subscribers, people familiar with the situation said. Altice has made initial contact with TWC."

 

 

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