Altice USA's small, rural cable purchase 'can only help,' analysts say

While Altice USA Inc.'s latest acquisition target, Morris Broadband LLC, is not as large as some of Altice's other recent quarries, analysts see the move as a positive step for the expanding cable operator.

Altice on March 1 agreed to buy Morris, which provides high-speed data, video and voice services to approximately 36,500 residential and business customers in western North Carolina. The debt-free and cash-free deal has a total enterprise value of $310 million.

Altice — one of the top five largest cable operators in the U.S. serving about 5 million customers — has been aggressive in the M&A space recently, and company executives have not been shy about their ambition to expand. Analysts view the push as a smart one, as it will help the New York-based company grow beyond some of its highly penetrated legacy markets.

Of course, Altice is no stranger to M&A. It was established in the U.S. by its former European parent, Altice NV, through back-to-back acquisitions of Suddenlink Communications in 2015 and Cablevision Systems Corp. in 2016. Altice USA then spun off from Altice NV in June 2018.

More recently, the company teamed up with Rogers Communications Inc. and sought to buy Canadian cable operator Cogeco Inc. and its unit Cogeco Communications Inc. for a combined total of about C$11.1 billion. Altice aimed to scoop up Cogeco's U.S. assets — namely, cable operator Atlantic Broadband LLC — while Rogers sought Cogeco's Canadian assets. The bid was ultimately rejected.

Despite the smaller size of the Morris acquisition, analysts see the buy as a positive step for Altice.

"They [Altice] understand that the market wants them to diversify away from the saturated and competitive New York market, and they know that they will be rewarded for shifting to an asset mix that will reliably grow," wrote MoffettNathanson telecom and cable analyst Craig Moffett in a March 1 note.

Moffett went on to say that, while relatively small, the acquisition checks both of those boxes.

"Morris is small, rural, competes exclusively against legacy DSL, and yet sports a relatively low 35% broadband penetration," noted Moffett. Morris will specifically expand Altice USA's footprint in North Carolina, where it already operates its Suddenlink business.

Rural cable operators are especially attractive to investors and strategic buyers as rural areas are traditionally less competitive. They have lower broadband penetration rates, and a higher proportion of customers in these markets are still using legacy DSL connections. DSL, delivered over older copper telephone lines, usually caps out around 25 Mbps to 100 Mbps, which is about half the normal speed range for cable internet, according to the consumer comparison site BroadbandNow.

Jonathan Chaplin, who leads the U.S. communications services research team for New Street Research, said in a March 1 report that the deal was a "solid acquisition for Altice" and "another example of their ability to drive incremental value through M&A."

Chaplin noted that while the opportunity to acquire larger assets, such as Atlantic Broadband, has been hard to come by, small deals, such as Morris Broadband, "certainly help on the margin."

"Mgmt. sees further opportunity to drive higher residential broadband penetration, higher SMB [small and medium-sized business] penetration, accelerated passings growth, and of course cost synergies," wrote Chaplin. "We estimate these factors should drive a doubling in EBITDA over the next two years," Chaplin added.

While Moffett says that the Morris deal is too small to be a game-changer transaction, he still believes the deal will improve the company's standing with investors.

"All Altice needs to do is convince investors that it can grow. This acquisition, while small, can only help," Moffett said.

Altice USA CEO Dexter Goei has been clear about his desire for the company to pursue further deals.

"If something like an Atlantic Broadband comes to sale or anything even of larger size than that, we definitely continue to believe that M&A is the best use of our capital, if anything is available," said Goei on the company's Feb 10 fourth-quarter 2020 earnings conference call.

In an interview with CNBC published March 1, Goei lamented the lack of available cable companies in the U.S. market.

"The reality is there's been nobody selling, nobody of size — of any credible size," Goei said in the interview. "And so with all the goodwill that we have and the expertise and the things that we think we can do — probably slightly better than some of our peers in acquiring businesses — we haven't had the opportunity to show our stripes again of anything of meaningful size," added Goei.