Short Altice Presentation From Sohn Conference Tel Aviv
The Sohn Conference in Tel Aviv just took place and at it Stephen Levey and Jonathan Half’s ION Asset Management laid out their case for shorting Altice. This is a popular hedge fund LONG – will be interesting to see who is right!
H/T Market Folly
Boom and bust cycles – history repeats itself
History is replete with the remains of once high-flying industries and over-leveraged companies
Altice overview
— Altice is a Pay-TV/mobile operator in Europe, Israel, and most recently the US with net debt/EBITDA of 5.7x
Altice “created” €15bn worth of equity value in 21 months
Telco M&A frenzy
The sector’s current EV/EBITDA multiple is 6.8x, up from 5.6x 5 years ago
Industry headwinds threaten traditional Pay-TV
- 7.3% of US households have broadband but no pay-TV subscription, up from 4.2% in 2010
- Rise of alternative OTT players
- Broadband connection has become commoditized – aka “dumb pipe”
Altice valuations have soared as sector headwinds have accelerated
Implausible EBITDA margins
— Altice claims that it has increased margins across its holdings
We question whether HOT’s “real” EBITDA margin has improved by 900bp
Wall Street overlooks the issues
- “Our 12-month ROIC-based price target of €41/shr incorporates a premium above our €30/shr valuation to capture Altice’s M&A potential” –Goldman Sachs note on Altice, Sept 8, 2015
- “Given that the NAV is clearly growing, we place a 25% premium to NAV in determining our €38.00/share equity valuation.” –RBC Capital note on Altice, Sept 18, 2015
- “Adding €3.5bn for a 50% probability of a revived Bouygues deal and a further € 4.7bn from additional M&A (based on our “PE” model) leading to a post-M&A Dec-16 TP of €28. –JPMorgan note on Altice, Sept 1, 2015
- Citi adds €2.5 of value for unknown future deals to Altice’s price target in a Sum of the Parts
Lucrative Wall Street fees ($200m for Cablevision alone) coincide with many sell-side analysts assigning lofty multiples and adding value for unknown future deals
10 questions for Altice management
- How do you explain fully the discrepancy between HOT’s reported 2Q15 43% EBITDA margin and your reported HOT margin of 48%?
- Why has HOT been aggressively growing capitalized content costs while reducing expensed content costs?
- Has Numericable shifted content costs from the P&L to the Balance Sheet?
- When do you expect to reverse subscriber losses in Israel and France?
- How much are content costs expected to rise at Cablevision over the next 3 years?
- How can Cablevision without a mobile offering effectively compete against Verizon triple play?
- Can you explain the difference in Cablevision cost-cutting guidance between equity holders and bond holders?
- Why do you think that you can generate EBITDA margins in the US that far exceed those of any other US operator, including those with greater scale?
- Why did you create a dual class structure despite the Expert Corporate Governance Service advising against it?
- Your aggressive cost-cutting efforts in Israel resulted in a large number of customer losses “due to poor service” and you’ve had to invest in “restoring customer service levels” (Altice 3Q14, 1Q15 earnings releases) . Why do you believe that this creates long-term shareholder value?
Summary
History is replete with sectors whose valuations reached disproportionate levels and then crashed. Every boom and bust cycle has a poster boy. In this cycle, it’s Altice
- We believe that Altice’s operating track record is far less impressive than we’re led to believe
- We question management’s ability to retain subscribers and whether they’ve utilized aggressive accounting to inflate EBITDA margins
- In our view, Altice has overpaid for Pay-TV acquisitions against the rising tide of OTT alternatives and cord cutting
- On realistic multiples, we believe shares are worth ~50% below the current price
See full PDF below.
