Patrick Drahi is betting billions that he can thrive where a succession of fellow French tycoons have flopped: the United States.
Drahi’s Altice SA is buying 70 percent of Suddenlink Communications in a deal that values the cable carrier at $9 billion. And that’s just a start. Altice has indicated it sees Suddenlink, with operations across the south and southwest, as a beachhead for further acquisitions in the U.S. And Drahi is said to have approached Time Warner Cable Inc. about a potential tie-up.
Drahi is following a long line of French telecom and media chiefs who have taken on the world’s biggest economy — with little to show for it. Vivendi SA almost collapsed after an ill-fated foray into Hollywood, and entrepreneur Xavier Niel fell flat last year when he tried to buy T-Mobile US Inc.
“European firms often go for the U.S. because of the size of the market,” said Tomasz Michalski, an economics professor at HEC business school near Paris. “But they’re not ready for the cutthroat competition and the business culture that comes with it.”
Over the past two years, Drahi has expanded Altice in France, Portugal and the Dominican Republic with a string of debt-fueled deals. In April 2014, he agreed to pay $19 billion for Vivendi’s SFR, France’s second-biggest mobile operator. And in December he paid $9 billion for Portugal’s former national phone monopoly. Drahi declined to comment for this story.
Village Roots
France’s third-richest person according to the Bloomberg Billionaires Index, Drahi has emerged as one of his country’s most visible business figures. He got his start in the 1990s with a tiny cable network in a French village, and now splits his time between Paris, Geneva, and Tel Aviv. With further opportunities in Europe limited, he’s targeting the U.S. after being rebuffed in efforts to buy the mobile business of French rival Martin Bouygues, according to a person familiar with the situation.
Altice plans to gradually expand through acquisitions in the U.S. following the same strategy it employed in France, the person said: building up a smallish cable operator and later expanding into new services and regions. With about 1.5 million customers in Texas, North Carolina, and 13 other states, Suddenlink is the seventh-largest U.S. cable carrier.
Cable has consolidated more slowly than mobile in the U.S. and therefore presents plenty of opportunities for further deals. Altice CEO Dexter Goei says he’s ready to buy as companies become available.
“We clearly expect to be right in the middle of that consolidation” in the U.S., Goei said on a conference call Wednesday. “Everything below Comcast effectively is in consolidation mode.”
Emmanuel Carlier, an analyst at ING in Brussels, says it will be difficult for Altice to compete with the likes of Comcast Corp., which has 22 million subscribers, No. 2 Time Warner Cable, with 11 million, and John Malone’s Charter Communications Inc., with 4 million.
“I’m not shocked that Altice is moving to the U.S.” given that it has been successful in several countries outside France, Carlier said. “I’m more shocked that they want to be one of the major consolidators in the U.S. cable market.”
Drahi’s purchase of Suddenlink is modest when compared to other French tycoons with trans-Atlantic ambitions. As CEO of Vivendi, Jean-Marie Messier in 2000 concluded a $44 billion deal with Seagram Co. Ltd., adding Hollywood studios and a music empire to his former water utility. After Messier was ousted in 2002 his successors sold off most of the assets he acquired.
Passport Wars
Another flagship Franco-American deal, the 2006 merger of Alcatel and Lucent Technologies, created years of acrimony. Hobbled by what insiders dubbed “passport wars” between French and American staff, the combined firm lost more than 10 billion euros before it agreed in April to be sold to Nokia Oyj.
More recently Niel, whose Iliad SA upended the French telecom industry with cut-rate mobile and broadband service, sought to replicate that formula in the U.S. by purchasing T-Mobile. His cash bid roughly equaled Iliad’s market capitalization and assumed $10 billion in potential savings — a figure industry analysts found hard to believe. T-Mobile’s owner, Deutsche Telecom AG, rejected the offer and Iliad’s shares dropped 24 percent by the time it abandoned the idea.
Even Drahi’s relatively small U.S. move, however, has its risks. Cross-border deals present limited opportunities for the kind of cost-cutting Drahi has undertaken in Europe, Credit Suisse analysts wrote Wednesday.
And Altice’s U.S. plans depend almost entirely on borrowed money. The company had more than 24 billion euros of net debt before the Suddenlink deal, which it will finance with another $6.7 billion of borrowing. Moody’s and Standard & Poor’s both rate Altice below investment grade, with a negative outlook.
Still, Drahi shouldn’t be counted out, according to Charter chief Malone. With his knack for finance, Malone said Tuesday, the Frenchman has the capacity to surprise the industry.
Drahi “is a growth guy,” Malone said. “He’s an acquirer, an aggressive acquirer taking advantage of low-cost debt right now and the ability to be pretty aggressive at cutting costs out of what he buys.”
Source:Bloomberg