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Analysts see an Altice USA purchase of Charter as pricey but possible

After launching in the U.S. with acquisitions of Suddenlink Communications and Cablevision Systems Corp., Altice NV may be closing in on a new deal.

Reuters reported Aug. 9 that its U.S. unit Altice USA Inc. is eyeing Charter Communications Inc. Should such a deal come to fruition and pass regulatory muster, it would make the new Altice one of the largest U.S. cable operators. Charter declined to comment on the report and Altice USA did not immediately respond to S&P Global Market Intelligence's request for comment.

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Based on subscriber metrics from the second quarter, a combined Altice/Charter entity would count 20.7 million video subscriptions, 27.7 million broadband customers and nearly 14 million phone subscribers, noted Kagan analyst Tony Lenoir. All in all, it would have a total of 31.7 million customer relationships across a footprint counting 58.2 million serviceable homes and businesses. Kagan is a media research unit of S&P Global Market Intelligence.

"Altice/Charter would control roughly 40% of the cable sector," Lenoir said. He suggested this might draw extra regulatory scrutiny considering Altice USA is owned by a foreign entity.

By comparison, Comcast Corp., presently the largest cable operator in the U.S., ended the second quarter with 22.5 million video subscriptions, 25.3 million broadband customers and 11.7 million phone subscribers.

Altice NV executives have made no secret of their interest in further M&A activity. During the company's earnings conference call, Altice NV CEO Michel Combes said the company intends to be "opportunistic" on the U.S. acquisition front. He added, "Obviously, our preference here — and we've been very clear about it — is to focus on cable right now."

Jeffrey Wlodarczak, CEO and senior media and communications analyst at Pivotal Research Group, has been saying for weeks that he expected Altice to make "an aggressive play" for Charter soon.

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"We continue to believe the market is underestimating the likely level of aggressiveness of [Altice USA] management given their access to sizable capital and their fundamental belief U.S. cable EBITDA margins should be well above current levels," Wlodarczak wrote in a July 27 research report.

In an interview on Aug. 9, Wlodarczak acknowledged that Charter would not come cheap. Shares in Charter closed Aug. 9 at $400.90. In terms of a per-share deal price, Wlodarczak said, "$425 is a logical good start," though he noted that if other interested parties, such as Comcast or Verizon Communications Inc., make rival bids, that could rise to as high as $500 per share.

Even so, the analyst said he is confident Altice can afford such a deal. "At the heart of Altice's bid is their fundamental belief that U.S. cable margins should be materially higher than where they currently are," he said.

Moody's Senior Vice President Mark Stodden agreed, noting that although Altice USA, with total debt of $22.84 billion, looks "highly levered" from a traditional standpoint, the company has a history of pursuing non-traditional financing strategies.

"The way that they operate gives them a lot more latitude than a more traditional company. And what I mean by that is they are very comfortable taking leverage up to astronomical levels and they're very aggressive with their strategy on cost cutting," Stodden said in an interview.

He pointed to their purchases of Suddenlink and Cablevision, noting that for both deals, leverage at inception looked "very, very high" but then came down "very, very rapidly."

"So the question is can they use the same playbook at a massive scale or will they run into the limits of the high yield market depth?" Stodden mused.

Based executive comments and Altice NV's acquisitive past, Stodden does not expect concerns over leverage or financing to stop Altice USA from pursuing a major deal. "They are willing to throw the long ball," he said.