Altice’s American cable companies will help bail out the parent company’s struggling French operations.

Cablevision and Suddenlink are coming to the rescue of their parent company Altice in a deal that will transfer $1.5 billion from the two American cable operators to help bail out its struggling European operation, according to the Wall Street Journal.

Founding shareholder Patrick Drahi is splitting his U.S. cable operations away from Altice NV, spinning them off into a new publicly traded company known as Altice USA. But Drahi has also ordered the new U.S. company to pay a one time $1.5 billion dividend, most of which will end up in the bank account of Altice NV to help the parent company reduce its leveraged debts that have been largely responsible for its falling stock price.

While Cablevision and Suddenlink customers can look forward to additional rate increases, shareholders of Altice USA are being enticed to invest with sweeteners including an unexpected dividend payout and a sudden decision by Drahi to forego his usual management fee charged to companies he acquires to acquaint them with the “Altice Way” of doing business. That fee can amount to an initial $30 million payment plus an ongoing percentage (usually 2-3%) of a Drahi-acquired company’s future revenue.

Altice USA believes it can afford the bailout thanks to President Donald Trump’s tax cuts. In addition to using $2 billion of anticipated savings to pay for share buybacks, Altice USA hopes to quickly recoup an additional $1.5 billion from reduced taxes and revenue increases it will earn from customer rate hikes and new broadband customers.

Altice NV, soon to be renamed Altice Europe, was a veritable disaster financially — called the “worst large-cap performer in Europe” in 2017. At the center of Altice’s European operations remains the dismally performing SFR-Numericable, the French wireless and cable company. After Drahi acquired the company, he slashed costs and investments and threatened to lay off one-third of its workforce. Service deteriorated and customers canceled in droves. Investors starting selling their Altice shares around Halloween of 2017, after watching Mr. Drahi pile on unprecedented debt and become convinced Drahi’s highly leveraged company could not succeed.

The Wall Street Journal cautioned potential investors in Altice USA that the new venture will gladly take your money, but give shareholders almost no say in how it will be governed. Drahi has engineered his continued dominance of the new entity with control of at least 51% of voting rights.

Wall Street analysts are largely positive about the deal, noting Altice USA won’t be attached to Altice’s European money troubles and the company will have the ability to extract revenue from its customers with ongoing rate increases.

While giant cable company mergers unexpectedly took a breather in 2017, Fierce Cable predicts this year isn’t likely to be a repeat of last year.

“With polls showing Democrats poised to begin sweeping back into power with the 2018 midterm elections, look for cable operators to make hay on the current regulatory climate and start turning their rivals into that most precious of resources: scale,” writes Daniel Frankel.

With time for large cable operators to get easy approval of merger deals from deregulation-minded Republicans potentially running out, 2018 could bring dramatic consolidation in the cable industry, with Comcast a likely buyer and Charter Communications a potential seller… if the offer is good enough.

Many industry observers expected the first year of the Trump Administration to be a banner year for cable mergers, especially with the entry of Altice, a European cable conglomerate known for its willingness to overpay to acquire cable operators. Altice has since run into significant financial challenges and investor blowback, forcing the company to shelve acquisition plans for now and focus on debt reduction and developing a stronger business plan to operate its ailing cable and wireless properties in Europe. Altice USA, which owns Suddenlink and Cablevision, has not shelved its plans to upgrade many of its customers to fiber to the home service, but is also no longer seen as an immediate bidder for Charter, Cable One, or WideOpenWest.

Fierce Cable expects Comcast to respond to AT&T’s merger with Time Warner, Inc., assuming the deal successfully overcomes Department of Justice objections in court, and 21st Century Fox’s asset sales to Disney. Both transactions threaten to consolidate programming production and distribution around an even smaller group of media giants, which could challenge Comcast’s NBCUniversal unit as well as the cost of cable programming networks. Comcast has shied away from acquisitions after an embarrassing failure of its attempt to buy Time Warner Cable a few years ago.

If Comcast wants to build scale, it would naturally target an acquisition of Charter Communications, the second largest cable company in the country. The deal would give Comcast dominance over the New York and Los Angeles media markets and broadband service provision across most major American cities. Comcast could also seek a less controversial acquisition of Cox Communications, one of the few major independent cable companies left. But Comcast could also seek acquisitions in Hollywood to bolster its production capabilities.

Most other cable acquisition options would be considered scraps by the largest operators. Altice could be persuaded to prematurely exit the American market and sell Cablevision and Suddenlink if convinced it has no chance of building adequate scale to stand with Comcast and Charter. Beyond that are smaller rural and regional operators including Mediacom, Midco, WOW!, GTT, RCN, and many others that serve fewer than one million customers.

Company executives may be hoping the objections to the AT&T/Time Warner deal are an anomaly for the Trump Administration. But it’s clear that whatever smooth waters exist for upcoming mergers will get choppy as the midterm elections approach. Should Democrats win back the House and/or Senate, life will get considerably more difficult for future media consolidation deals.

Drahi’s World

Shareholders have shaken Patrick Drahi’s dreams of being the next king of telecom in the United States by plunging Altice’s share price by more than a third in a single week, forcing Drahi to announce he won’t be making any additional acquisitions until the company’s staggering $59 billion debt is repaid.

Investors were also given a sacrificial lamb from the very sudden departure of Michel Combes, the ruthless cost-cutter that also served as titular operations leader of Altice’s European operations. Combes paid the ultimate price for the continued mediocre financial results at SFR-Numericable, which provides wireless and cable service in France and is Altice’s largest holding. That departure comes only two months after Michel Paulin, Drahi’s right-hand man at SFR, was also shown the door.

Drahi made it clear that he is formally taking back control of Altice, although observers have claimed he has always been in charge. European business analysts have uniformly described Altice as a company mired in crisis management, as European investors lose trust in Drahi’s business philosophy, which depends heavily on acquiring companies with other people’s money.

Drahi’s prominence in France came with his acquisition of SFR-Numericable just three years ago. SFR is France’s fourth largest wireless carrier and the company also has a prominent place in the wired telecom market, providing cable television, phone and internet service. Drahi has attracted investors with promises to wring every possible concession out of the companies he acquires. For financial markets, Drahi’s best trait is his ruthless cost-cutting and employee reductions. In France, employees have reported providing their own copy paper and toner cartridges for empty office printers, occasionally supply their own toiletries, and take turns mopping floors and vacuuming offices.

Employees of Altice-owned Suddenlink have been forced to take requests for replacement coffee machines for break rooms to skeptical company committees that review virtually every transaction. More recently, Cablevision technicians are complaining Altice eliminated their winter apparel budget, leaving workers without coats, bibs, overalls, or rain gear for the upcoming winter. Technicians will have to pay for their unsupplied winter gear out-of-pocket.

While shareholders and financial analysts bid up Altice stock on the premise that cost cutting would deliver better results, the fact France has a highly competitive telecom market brought unintended consequences for Altice and its shareholders: customers fled as cost cuts took their toll on service quality and support.

Competition Matters

Between the end of 2014 and mid-2017, SFR lost 514,000 subscribers in wired internet and 1.7 million mobile customers, delighting Altice’s competitors Orange, Free, and Bouygues Telecom. SFR’s internet problems are well-known across France. Altice’s attempt to offer a “one-box” solution for internet and television service has been of dubious value. Its equipment is notorious for failures, has compatibility problems with online games, and has high support costs. Altice is starting to bring similar equipment to the United States to supply its Cablevision customers, and technicians report many of the same problems are occurring in the U.S., adding they are skeptical Altice’s Le Box, known here as Altice One, will perform well for customers.

The biggest enemy of Altice in Europe is robust competition, which has allowed dissatisfied customers to switch providers in droves. SFR-Numericable, despite promises of fiber-fast speeds, has endured complaints about slow and uneven speeds and persistent service outages. Drahi’s original business plan was to upgrade broadband speeds and performance to win over France’s remaining DSL customers. That worked for a time, according to the French newspaper Libération, but not for long.

Paulin, who used to run the division responsible for Altice’s wired broadband, complained bitterly competitors have “polluted” his marketing campaign by advertising their 100% fiber optic networks, educating customers that Altice isn’t selling that. That ruined Drahi’s plans to slowly upgrade services with the belief customers are more captive to their broadband provider and wouldn’t switch providers if Altice took its time.

A competitor put it this way: “SFR’s remaining DSL customers have indeed migrated at the encouragement of SFR-Numericable… to Orange or Free’s 100% fiber optic network offerings.”

Accusations about service problems and slow upgrades were readily believed by customers because Altice drew headlines for its ruthless efforts to save money.

“First, the restructuring – cuts in spending and pressure on suppliers – has shaped its image as a bad payer,” notes the newspaper. “At the end of 2015, SFR was fined $400,000 for its late payments. Second, package price increases, imposed discreetly and justified by the addition of exclusive video content, annoyed customers when they found extra charges on their bills. Finally, recurring network problems have undermined user trust. The new satisfaction survey of UFC-Que declared SFR was in last place among operators.”

Altice’s one-box solution for TV and internet has proven troublesome for customers in Europe.

Altice blamed most of SFR’s problems on its previous owner, Vivendi, who it claimed underinvested in its network for years. But customers were in no mood to stick around waiting for upgrades. Throughout 2015 and 2016, customers fled, finally forcing Drahi to embark on costly upgrades of SFR’s wireless and broadband networks. Drahi’s investments in SFR amounted to only $2 billion in 2014 and $2.12 billion in 2015, but dramatically increased to $2.71 billion in 2016. By the beginning of 2017, the upgrades stemmed some of the customer losses as independent tests showed SFR’s 4G LTE service finally became competitive with France’s top two providers. SFR commissioned 5,221 new 4G cell sites over the last 12 months, beating 4,333 for Bouygues Telecom, 3,543 for Orange and a distant 2,010 for low-cost carrier Free.

The Suddenlink/Cablevision Cash Machine

Patrick Drahi, Altice, and his friends at Goldman Sachs are depicted as working together to make Altice’s acquisition dreams come true.

Patrick Drahi rarely gives up on his dreams. His latest is to be America’s biggest cable magnate, and there are signs he is laying the groundwork to make that dream come true.

CNBC and some French media outlets report Drahi’s Altice NV and Altice USA are assembling their European and North American financiers, attorneys, and dealmakers to potentially make an offer to acquire Charter Communications. If successful, Altice would leapfrog to the largest cable operator in the United States after combining its Cablevision and Suddenlink systems with Charter’s own legacy systems and those it acquired from Time Warner Cable and Bright House Networks.

Any succcessful deal would likely require an offer of $500 a share for Charter stock, which would make the company worth about $200 billion. Because Altice is dwarfed by Charter, it is unlikely Drahi will be able to raise enough cash on his own to make a deal, and Altice is already mired in debt from its ongoing aggressive acquisitions. Drahi’s biggest competitor for Charter is expected to be Japan’s SoftBank, which has shown an interest in acquiring the cable operator to combine with its wireless carrier Sprint.

Altice isn’t likely to encounter the regulatory hurdles that have caused other colossal cable deals like Comcast’s attempt to buy Time Warner Cable to collapse over regulator opposition.  Drahi’s involvement in U.S. cable has been limited to acquisitions of two smaller players – Cablevision and Suddenlink.

Drahi’s strongest arguments to sell investors on the deal are likely to surround his well-known obsession with draconian cost-cutting at his acquired companies. Drahi would certainly offer investors billions in deal synergies and savings, accomplished through dramatic layoffs, scrutinizing costs right down to replacement coffee makers for the break room and copy paper for the office, and sweeping cutbacks on employee and vendor perks. Drahi has also taken a strong stand against Hollywood studios and cable programmers that seek double-digit rate increases for cable programming. In Europe, Drahi is known for terminating costly contracts with programmers and launching alternative channels Altice owns and operates to replace them.

Drahi is also likely to sell regulators on his current plans to transform cable in the United States away from coaxial cable and towards fiber optics straight through to the home. Drahi has already offered to wire all of France with fiber optics and is presently embarking on a fiber upgrade for his Cablevision systems in New Jersey, New York, and Connecticut. But Drahi’s ambitious fiber plans have been met with suspicion in France where some believe Drahi is all talk and no spending.

He has promised the Macron government he will spend $17.6 billion on building an Altice-owned fiber broadband network in France by 2025 without any taxpayer subsidies. While that sounds laudable, it would mean Altice’s SFR would pull out of the government’s national fiber strategy that depends on different telecom companies building out fiber in different regions of the country.

Drahi is threatening to become a spoiler because before he acquired SFR, the former management cut a deal with Orange – France’s largest telecom company, to jointly build a fiber network for 14 million French households in smaller towns and suburbs. Orange would build and own 80% of the territory, SFR 20%. But because SFR needs access to that fiber network for its own wired and wireless broadband and television services, it will have to pay rental fees to Orange to use the network in most of the territory. Drahi instead wants a 50-50 ownership split to cut costs and Orange has said no. Altice’s plans for its own alternative fiber network would allow it to bypass the Orange-owned network and deliver traffic over its own fiber system. That could mean parts of less-populated France will have two fiber networks to choose from instead of just one.

Drahi

It is an expensive gamble, but investors seem largely unfazed so far, perhaps suspecting Drahi has no intention of actually following through on spending billions on a potentially redundant fiber network in the suburbs and farm country, preferring to believe the threat of doing so will drive Orange back to the negotiating table.

Some American analysts are uncertain whether Drahi can pull off an acquisition deal that would combine Charter, a company many times larger than Altice, with Altice’s much smaller earlier cable acquisitions. Some also suspect he won’t find enough money to attract interest from Charter’s biggest shareholder — John Malone’s Liberty Media and Charter’s current CEO Thomas Rutledge.

But French media has little doubt Drahi can pull it off, especially when he is motivated.

“Patrick Drahi, founder of Altice, has set his limits: he has none,” notes Le Figaro, adding Drahi is a classic industry spoiler, completely happy to blow up cable’s comfortable status quo, even when at risk of attracting the wrath of his competitors.

CNBC reports Altice is preparing a serious offer to acquire Charter Communications. (5:54)

Altice’s Suddenlink Communications has announced gigabit service for its customers in Batesville and El Dorado, Ark., Maryville, Mo., and Conroe, Tex.

“Today’s announcement is the next step in Altice USA’s Operation GigaSpeed initiative to provide gigabit broadband service to our Suddenlink customers,” said Hakim Boubazine, co-president and chief operating officer of Altice USA, in a statement.

Altice will continue to use DOCSIS 3.0 technology for most of its Suddenlink customers instead of adopting DOCSIS 3.1 in the near future. Because Suddenlink systems are all-digital, Altice is using a significant amount of its available cable bandwidth for broadband services. Customers who don’t want to pay for 1,000Mbps can also choose from 100 and 200Mbps plans, up from 75 and 100Mbps respectively.

These communities bring the number of GigaSpeed enabled cities in Suddenlink territory to 45. Here are the others, below the break:

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