New York City officials are questioning the promised benefits of allowing Patrick Drahi’s Altice to acquire Cablevision in an all-cash deal that would combine ownership of Suddenlink and Cablevision under the European-based cable conglomerate.

Mayor Bill de Blasio’s chief legal counsel told the Wall Street Journal she is skeptical about Altice’s proposed $900 million in cost cutting at Cablevision leading to better service.

“Altice is talking about $900 million in synergies. Well, what’s getting cut? How’s that going to impact the economy of New York and quality of services?” asked Maya Wiley. “We certainly are not afraid to disapprove a transaction.”

Altice’s Public Interest Statement, outlining the public benefits of the acquisition, was perceived as long on rhetoric but woefully short on specifics. Altice officials made vague promises to expand fiber optics across Cablevision’s footprint in return for approval of the transaction, but stopped short of committing to offer fiber to the home service.

Stop the Cap!’s Special Report, reviewing the proposed acquisition of Cablevision, attracted the interest of investors on Wall Street as well as several New York City public officials we spoke with about the proposed buyout.

City Hall of New York (Photo: Will Steacy)

On our recommendation, New York officials reviewed French press coverage of Altice and its colorful CEO Patrick Drahi. Dozens of articles have covered Drahi’s controversial business practices over the years, including efforts to stall payments for suppliers, initiating salary and job cuts, and a reduction in spending on meaningful service upgrades. His French operation SFR-Numericable lost one million customers in just one year. Earlier this year, he promised increased investment to turn those subscriber numbers around.

Wall Street is also increasingly skeptical about Drahi’s American business plans.

Cablevision’s stock price has dropped well below Altice’s all-cash offer of $34.90 a share, telegraphing concern the deal will not escape regulator scrutiny and ultimately will not close.

“The spread has widened in large part because people have become increasingly concerned that neither the city nor the state will find that the transaction is in the public interest, or alternatively, they’ll demand so much in terms of givebacks that ultimately the deal won’t be palatable to Altice,” Craig Moffett, analyst at MoffettNathanson LLC, told the Journal. “Altice dramatically overpaid, and their attempts to cut costs are both overly ambitious and are potentially injurious to what we already expected to be very weak operating results.”

If Drahi wins approval to take over Cablevision, Altice is likely to curtail promotional spending at the cable company. The cable operator competes head-to-head with Verizon FiOS across much of its downstate New York, New Jersey and Connecticut service areas. That will likely lead to higher prices and fewer deals for consumers as price competition cools down.

The deal remains under review by the New York Public Service Commission and the FCC. Decisions from both are not expected until next spring.

On Monday, Altice closed its acquisition deal for Suddenlink, a cable operator serving states with more forgiving and business-friendly regulators.

As expected, Altice immediately named an executive team that will oversee significant cost cutting and reorganization at the cable operator that serves mostly rural and small city customers.

Two Suddenlink employees reached out to Stop the Cap! on Tuesday to tell us morale was dropping among middle managers at the cable operator.

“Most of our employees have little idea who Patrick Drahi or Altice is and they are not aware of the business reviews we’ve been told are coming after the holidays,” said one West Virginia based middle manager. “Some of my colleagues in customer care are updating their resumes this week and I’ve also heard concerns from technicians and IT workers. Some want to jump out early to secure new jobs before expected job cuts cause a small flood of resumes all over the state.”

“It’s a worrisome Christmas because we are not sure how many will be let go,” writes a Suddenlink mid-level IT manager working in Texas. “Salaries at Suddenlink have never been high but a lot of us prefer to work in our hometown and not move to Dallas or Houston to work for companies like Time Warner Cable or AT&T. It’s also a more relaxed work environment, but now there is a lot of concern what the new management will be doing.”

Goei

Chairman and CEO Jerry Kent announced he will be leaving Suddenlink in those roles but has agreed to chair a new advisory council at Altice USA, the subsidiary established to manage Altice’s American cable assets.

Head chopper Michel Combes, the new chief operating officer of Altice NV, is expected to coordinate U.S. operations. Combes brings his reputation for ruthless cost-cutting from his last job — CEO of Alcatel-Lucent. In an effort to boost profitability and cut costs, Combes presided over 10,000 job cuts and a salary freeze (except for himself and select others) at the company better known as the former Bell Labs. Two years after wielding the hatchet, Combes engineered a sale of the company to Nokia and secured a large golden parachute package for himself. The optics of Combes’ overseeing salary freezes and job cuts while later lobbying for a retirement package focusing on his own personal enrichment caused a political furor in France.

The new management of Suddenlink has limited experience in cable but plenty of experience working at Wall Street banks.

The chairman of Altice USA is Dexter Goei, who joined Altice in 2009 after a career in investment banking at JP Morgan and Morgan Stanley that spanned 15 years. Charles F. Stuart, also a former investment banker at Morgan Stanley, will become co-president and chief financial officer. Abdelhakim Boubazine, former CEO of Altice’s operations in the Dominican Republic, will also serve as co-president and chief operating officer. His LinkedIn profile mentions his involvement in telecommunications began in 2013. His educational background strongly emphasizes fossil fuel engineering.

The French press continues to ridicule Patrick Drahi’s debt-laden acquisitions as “Altice in Wonderland.” (Cartoon: Les Echos)

The next owner of Cablevision and Suddenlink put profits ahead of people and managed to drive away more than one million of his own customers in Europe within a year of a massive cost-cutting operation that led to service degradation and noncompetitive prices.

Patrick Drahi’s Altice NV has similar plans in store for both American cable companies if he manages to win regulator approval of the acquisitions.

The Wall Street Journal reports Altice was willing to sacrifice market share if it meant the company could extract cost-savings and higher profits that Drahi could use to help pay off some of his acquisition loans.

Some Wall Street analysts were initially excited to hear Drahi would slash salaries, knock union heads, and eviscerate at least $900 million in costs annually from Cablevision, results likely to boost Cablevision’s share price and fatten investor returns.

The cost-cutting formula is always the same in an Altice takeover. Special teams arrive from Europe within days of a deal closing with strict instructions to cut employees, reduce the salaries of those remaining, and brutally cut costs out of the business. Drahi is famous in Europe for stopping payment on checks to suppliers, leaving them unpaid until they agreed to offer his company discounts up to 40%. Employees also share stories of having to pay for office supplies out-of-pocket and in at least one case, staffed a wireless store that carried no phones in inventory because Drahi stiffed his supplier.

Drahi

The bad news for Wall Street? Customers of Drahi’s cable and wireless companies are fleeing in droves. At least 1.1 million of Altice’s French customers have taken their business elsewhere, fed up with deteriorating service and uncompetitive prices.

One manager lamented that as Altice-owned Numericable-SFR’s wireless network deteriorated to the point of regularly dropping calls, Drahi borrowed nearly $2 billion he set aside in preparation for further acquisitions.

“Debt is Drahi’s drug,” commented French news site LeJDD.

Drahi leverages his buyouts with loans covering up to 80% of the purchase price. Eerily similar to toxic sub-prime mortgage debt, investment banks consider holding too much of Drahi’s debt potentially poisonous, so they routinely repackage it with other loans and resell it to other financial institutions and unknown investors. That has some in the French government concerned Drahi is building the world’s first “too big to fail” telecom company, while leaving investors in the dark about the risks of holding his loans.

The lessons learned watching Drahi manage one of France’s largest wireless operators may concern U.S. regulators contemplating Drahi’s buyout offers of Cablevision and Suddenlink.

In the first quarter under Drahi, SFR boosted margins by 21% based on ruthless cost cutting. But a stunning 445,000 customers quickly left the operator. Critics contend Drahi’s cost cutting does temporarily boost profits, but also allows network quality to degrade, eventually alienating customers who leave. Drahi then uses SFR’s smaller customer base as an excuse for further cost-cutting. Between 2006-2011, Drahi eliminated half of the wireless provider’s workforce and outsourced much of his call center customer support operations.

Those still working at Altice companies after the cost-cutters depart are left in a state of siege.

“He’s a beast,” one employee told LeJDD in a piece that compared working for SFR with being in hell. All expenses are scrutinized, company-paid travel is canceled, team exercises and company meals are dropped, and for vendors and suppliers things are even worse. All projects are frozen and all outstanding invoice payments are stopped, reviewed one-by-one. Drahi’s goal is to find 600 million euros annually in savings to repay the €13 billion he borrowed to acquire SFR in 2014.

Employees, even those represented by France’s powerful trade unions, are scared into silence, reports LeJDD.

“Be happy you have a job,” is the standard response one trade unionist routinely receives from what is left of SFR’s management. Drahi doesn’t spare management below him either. Within weeks of Altice’s takeover, the flown-in French cost cutters immediately terminated 55 of the 70 SFR managers earning more than 150,000 euros per year. At least 100 middle managers were also quickly shown the door. IT and networking positions are also deemed ‘bloated’ and a reorganization quickly whittled employees down to a token force. The marketing department? Abandoned. Also dismantled was SFR’s team of innovators, working on next generation network upgrades and technology.

Call centers that handle customer service requests were “on the verge of suffocation,” reported LeJDD. One small call center operator had to send his attorney to SFR’s offices to threaten them over an outstanding bill of one million euros. Drahi demanded an immediate 35% discount if the attorney wanted to leave with a check in hand.

Cable customers share their own anecdotal stories, including one forced to acquire and supply his own cable to complete an installation because the technician had run out. Another reported a tardy cable installer humbly apologized, claiming he was forced to pay out-of-pocket for fuel to get his stalled cable truck back on the road again.

The horror stories from Europe are making an impact in New York’s financial markets, along with Altice’s improbable formula of profiting from alienating customers. After 18 months of unbridled growth and 47 billion euros in loans to finance multiple acquisitions, Wall Street is getting worried. Altice has lost 50% of its value in just six months and Moody’s has now rated Altice’s debt as “highly speculative,” the last step on the basement stairs right before “default.”

“Drahi carries too much debt,” said the head of a French investment fund. “He and his team have lost all sense of reality.”

LeJDD put it more colorfully: “The ogre was too greedy.”

To placate investors, Drahi is planning to slow future acquisitions, something he may not have had much say in. Bankers forced Drahi to accept considerably higher interest rates to finance his American cable company buyouts.

Numericable-SFR’s long-dead marketing department is also being revived, offering discounts and marketing the service more aggressively to stem customer defections. But the company’s increasingly poor reputation is making that a hard sell in Europe, where fierce competition among multiple providers has fueled a long-lasting price war.

Altice officials point to the fact their severe cost-cutting strategy may have faced greater challenges in Europe, where competition is always a speed bump to high profits. But company officials privately stress their ‘profits first’ formula stands a better chance of success in America, where customers don’t have a lot of choice. Competition is less risky for Suddenlink than it is for Cablevision. Altice promises to wring $215 million annually in savings out of the largely rural and small city provider Suddenlink. But Altice’s estimate of $900 million in savings from Cablevision, which faces formidable competition from Verizon FiOS, seems much less realistic, according to Wall Street analysts.

MoffettNathanson analyst Craig Moffett said Altice was taking cuts to an extreme.

“You’re talking about huge cuts to customer service levels to installation and maintenance costs to marketing and promotions,” Moffett told Reuters. “You can’t expect to be able to make dramatic cuts… without having an impact on the business.”

Suddenlink’s Operating GigaSpeed has reached parts of Texas, Missouri and North Carolina — the first areas to get 1,000/50Mbps service from the cable company. But customers are not happy to learn it is accompanied by a 550GB usage cap.

The first markets qualified for gigabit service include:

• Bryan-College Station, Texas;
• Nixa, Mo.;
• Greenville and Rocky Mount, N.C.

Customers learning about the faster speeds tell Stop the Cap! they are deeply disappointed Suddenlink has kept a cap on the premium-priced speed tier.

“Here in Greenville they are charging $110 a month for the service, $5 for a cable modem or $10 for a Wi-Fi router, and a $35 mandatory technician visit fee which sounded reasonable until they mentioned there was a 550GB data allowance on the service,” said Stop the Cap! reader J.J. Wallace. “That killed it for me. That is nothing short of outrageous to charge that kind of money and place a ridiculously low cap on it. It’s funny the local newspaper and Suddenlink’s press releases never bother to mention the usage cap.”

Wallace says he avoids usage caps by subscribing to Business Class service, which carries no usage allowance but forces him to a slower speed tier to keep things affordable. A 50/8Mbps business plan costs around $80 a month with modem rental and Suddenlink does not mind selling it to residential customers who refuse to deal with a usage cap.

“That is just about the most affordable plan they have that is tolerable,” Wallace writes. “If you want gigabit speeds on a business account, that will run you at least $575 a month plus equipment fees.”

“Suddenlink is no Google Fiber,” adds Pitt County resident Jennifer Davis. “Google is coming to the Triangle and Charlotte and can easily sell gigabit service for $40 less with absolutely no usage cap or equipment fees. Suddenlink wants another shake of our pocketbooks to grab even more money from us. You can’t even buy your own modem for gigabit service. You have to rent theirs. My area of the county is stuck with Suddenlink like a punishment. As a small business owner who depends on the Internet I am tired of being jerked around by these people.”

Some Suddenlink customers have managed to score better deals for broadband by threatening to leave Suddenlink for the phone company, often CenturyLink, AT&T, or Windstream.

“If you impress on them they are charging too much, they will often find a promotion for you, but so far I’ve had no luck getting them to waive the caps unless you switch to business service,” said Wallace. “They always act like you are the first person to complain about usage caps, but if you read their social media pages, there are many others very upset to find they’ve lost unlimited use service after Suddenlink introduced speed upgrades. Most of my friends would rather have unlimited than faster service you can’t use.”

As for speed upgrades, the communities now qualified for gigabit service will find some changes as Suddenlink adjusts their Internet tiers:

• Internet 50: 50/5Mbps is the new base speed with a 250GB cap
• Internet 100: 100/10Mbps comes with a 350GB cap (current 75Mbps customers upgraded to this tier)
• Internet 200: 200/20Mbps comes with a 450GB cap (current 100Mbps customers upgraded to this tier)
• Internet 1 Gig: 1,000/50Mbps comes with a 550GB cap
• Overlimit Fee: $10 per 50GB of usage, not pro-rated

Suddenlink is pushing existing DOCSIS 3.0 technology to its practical limit offering gigabit service. The latest DOCSIS 3.0 chipsets in newer model cable modems can bond up to 32 downstream channels, enough to support up to 1.2Gbps. To make room for gigabit speeds, Suddenlink needs to migrate its cable television offering to an all-digital format in the cities where it offers the fastest service. It also needs to retire any remaining legacy DOCSIS 2 modems still in use.

Operation GigaSpeed will offer gigabit broadband to all Suddenlink customers in the markets where the service is offered. The company considers that an advantage over Google Fiber and AT&T U-verse with GigaPower, which is only available in certain neighborhoods.

DOCSIS 3.1, expected to make gigabit speeds available more widely on cable systems, is expected to begin market trials as early as later this year with an expectation it will begin to see wider deployment in 2016.

A tiny Madison Avenue investment bank (so small its only web presence is a webpage displaying its logo) that spent one week advising Charter Communications on its merger deal with Time Warner Cable and Altice SA on its acquisition of Suddenlink Communications will earn as much as $65 million in fees if both deals close, according to a report from Bloomberg News.

LionTree Advisors has fewer than 50 employees, which adds up to more than $1 million per worker. Charter is expected to be billed as much as $25 million for the bank’s advice on the Time Warner acquisition and $40 million advising Altice on its buyout of Suddenlink. That represents about $1 from each Charter, Time Warner Cable and Bright House Networks customer and approximately $27 from each Suddenlink customer.

Aryeh Bourkoff and Ehren Stenzler, co-founders of the bank, were more than little thankful to “be a part of these transactions on behalf of our clients.”

Drahi (center) surrounded by executives.

The billionaire owner of France’s largest cable operator has acquired St. Louis-based Suddenlink in a surprise $9.1 billion deal, and it is likely only the first move for the Altice Group in the U.S. cable business. But it may not be a welcome one for customers, employees, and suppliers of America’s seventh largest cable company about to be introduced to the notorious “Drahi Method” of conducting business that French newspaper La Parisien calls “brutal.”

The acquisition of Suddenlink represents a modest first step for a company that hopes to divide its business half in Europe and half in the United States. Incorporated in Luxembourg for tax-savings purposes, most of Altice’s interests in the cable business are in France and its overseas territories. Numericable is Altice’s cable brand in Luxembourg, France, and parts of Portugal and recently acquired SFR is Altice’s fiber broadband and mobile brand in French-speaking Europe.

Moroccan-born billionaire businessman Patrick Drahi sees investing in cable as a great opportunity to build needed cash flow from America’s pervasive broadband duopoly. Altice is heavily in debt, financing a whirlwind of acquisitions including Israeli cable and mobile providers, Portugal’s largest telecom company, a mobile carrier in the Dominican Republic, in addition to SFR, France’s second largest wireless company, all mostly paid for with debt and junk bonds. That’s a long way from Drahi’s early days in cable, when he sold service door to door for his small regional Internet and cable-TV company in France’s Alsace region.

Suddenlink’s national service area

His mentor is Dr. John Malone, America’s former cable magnate, who followed a similar pattern of buying up cable companies across the United States in the 1970s and 80s to create Tele-Communications, Inc. (TCI), then America’s largest cable company (it was later sold to Comcast). Drahi shares Malone’s philosophy for cash flow-generating acquisitions: “Always start with cable.” He has plenty of opportunities in the United States, which unlike Europe is largely a cable broadband duopoly in big cities and a monopoly everywhere else. While Drahi confronts revenue erosion from European telecom price wars among phone, broadband, and television companies, he has plenty of room to raise the rates on captive customers on the other side of the Atlantic.

The average Suddenlink customer lives in a small to medium-sized city in West Virginia, Texas, Arkansas, Louisiana or Arizona. Suddenlink is well-positioned to sell its 1.5 million customers broadband service, because the alternative is usually low-speed DSL from companies like Frontier, Windstream, CenturyLink or AT&T. Drahi will sell all the services Suddenlink traditionally has, but customers can expect to pay a higher price.

Drahi has decided to focus on his high-end customers and has stopped competing to win customer volume based on price. The customers that pay the most for service also get the best customer service. If lower-end customers feel ignored and decide to leave, that is increasingly an accepted fact of life by Altice management. As a result, Numericable-SFR continues to lose mobile and market share in Francophone markets because customers have found better deals elsewhere. But the company is still keeping its best customers well-pampered and they have stayed, so far.

Life will be anything but pampered for Suddenlink employees and suppliers, who will soon be targeted for Drahi’s traditional culling of the herd and vicious cost cutting. European capitalists look in awe at “the Drahi Method,” a program of ruthless cost controls, job cuts, and threats visited on every acquired company. The French press is buzzing about Drahi’s latest acquisition in the United States, and wonder if Drahi’s slash and burn management style was better suited to America’s greed era of the 1980s and not the Obama’s ‘we are better than that’ era of the 2010s. But they know the story of how Drahi takes over is always the same.

Suppliers complain Drahi’s companies don’t pay their bills.

After each acquisition is complete, Altice flies in a small team of executives who live to slash costs. It’s what Le Echos calls “helicopter management.” Many middle and upper management at the acquired companies are terminated instantly, replaced with relocated Drahi loyalists. Salary freezes are imposed on those remaining and are indefinite. Job cuts in customer service are frequently next and are sometimes severe. In fact, the company’s relationship with its employees is so bad, the French trade union CFDT has taken several actions against Altice-owned SFR-Numericable over pay freezes and terminations they call unjust for a company collecting a profit margin of more than 25%, even during a price war.

But the worst is reserved for the suppliers that provide everything from coaxial cable to paper for the office printer.

“Suppliers are fifth wheel,” complained one French company that considered itself extorted to hand over a 40% discount just to get their past due invoices paid. One told Le Monde the best a supplier can hope for from an Altice-run company is to barely survive. Many more die than live.

Sometimes, the hardball tactics against suppliers and vendors seem to backfire on the company. Les Echos shares the embarrassing story of the major SFR-owned mobile store that had a big problem. This past January, the demonstration display where customers can sample the latest tablets and smartphones was curiously empty, except for a few employees milling around a coffee machine placed there to take up some of the empty space. Where were the phones and tablets to show off to make the sale? The distributor who supplies SFR had not been paid. No payment, no phones.

Drahi’s company even stiffed Cisco, which sent this warning note suspending shipments pending payment.

Just a few months before announcing his deal to acquire Suddenlink, a large group of French suppliers went to French authorities to seek a broad-based mediation to stop Drahi’s promises of payment in return for future discounts.

Les Echos reports Drahi spared no one from the cut.

“Cleaning companies, network equipment manufacturers, call centers, manufacturers of smartphones, TV, everybody goes,” it reported. Drahi’s managers even dared to challenge the local power company, Dalkia, threatening to cancel their energy services contract unless the company was granted an immediate 80 percent discount. Le Figaro reported the company ignored the contracts it had already signed with the energy company.

An empty bag: No phones at the SFR store.

“It’s vicious,” one supplier told Les Echo. “For them, everything can be renegotiated, even contracts already signed and running.”

An IT company also accused Drahi’s company of refusing to pay for past work unless it received a 30% discount. The firm said no and threatened to sue. It is now facing bankruptcy because its business overwhelmingly depends on Numericable and SFR.

The cuts can also seem petty.

Last December, office workers in Saint-Denis found themselves without paper for the office printers. Numericable SFR management had not bothered to pay its office suppliers and they cut the company off. This year, employees report they often have to bring their own toilet paper to work as the company has stopped stocking employee restrooms, apparently part of another cost-cutting measure.

The problem of unpaid invoices has grown so bad the cable operator is increasingly responsible for suppliers clogging the only Commercial Court in Paris with cases large and small, including those from Pace – the company that provides set-top boxes for Drahi’s cable companies, M6 – a television channel not paid for its programming, STS – a major software company, Orange – a major telecom operator, and even the workers who solicit customers to buy cable service going door to door, who say they have not been paid either. In fact, Numericable-SFR has been hauled into court with stunning regularity, losing almost every case, and forced to pay costs, including court fees and interest. The company has already been convicted 12 times for unpaid bills and in several other cases, it only agreed to settle minutes before a trial began.

Altice’s willingness to put itself deeply in debt just to make more acquisitions was enough for Moody’s to throw a caution flag in February, warning investors the company was under review for a credit downgrade.

“Today’s rating action is prompted by significant uncertainties about the funding of the envisaged €1.95 billion share repurchase program and its impact on Numericable-SFR’s liquidity, leverage and operational flexibility. Moody’s views the potential transaction as aggressive given that the company closed the large acquisition of SFR only recently and is still in the early stage of integrating the acquired asset,” the ratings agency said.

One might forgive Drahi’s desire to economize, considering his recent acquisition of SFR left Altice in debt for more than $12 billion and owing $55 million in interest payments a month. But Drahi continues his acquisitions unabated by those economic realities.

Another problem is Drahi’s crackdown on who is authorized to pay suppliers and other vendors. Under SFR’s old owner, about fifty employees were authorized to sign checks over €100,000 across all of France. Today, any check over €10,000 must be signed by at least one of just three employees. Silicon reports the crackdown became even more severe last winter.

“Since December, any investment must be approved by the investment committee,” a source told Silicon. “All projects are blocked, all expenses must be justified, even 50 Euros. It is set to ‘stop and go’.“

The inherent delays and austerity measures eventually also reach customers, according to ex-employees who say getting a replacement box or new cable strung can be a major problem when suppliers stop shipping and the company stops buying. It can also annoy customers that discover calling customer service no longer means talking to an employee in France. Drahi found call centers in Tunisia and Morocco that would do the same work for a fraction of the price.

Drahi said his Suddenlink acquisition is only the start. He has reportedly also shown an interest in acquiring Time Warner Cable, and shares of Cablevision stock were also increasing this afternoon suspecting that company could also be a target.