Altice USA (ATUS) – Odd Lot Dutch Tender Offer – $174 Upside

Current Price: $34.24

Offer Price: $32.25 – $36.00

Upside: $174 (for 99 shares)

Expiration date: 21st December 2020

Offer document

 

One of the largest cable providers in the United States, Altice USA has announced a $2.5bn dutch tender offer with odd-lot provision. The company intends to purchase up to 22% of outstanding class A shares. Shares are currently trading at the middle of the range offering $174 upside and $197 potential loss for holders of 99 shares, so the risk-reward is quite close. Worth noting that ATUS is a $19bn company, so it’s quite likely that the market is evaluating the eventual acceptance price correctly. Nonetheless, here are some points in favor of the upper limit pricing:

• Patrick Drahi (founder) owns 41.1% of class A shares and won’t participate in the offer. It seems likely that the CEO, who is very bullish about the current share price of the company and holds 3.7%, to abstain from tendering as well. This means that the offer is being done for 36%-40% of the remaining class A shares.
• Management clearly thinks that the stock is cheap and has already significantly surpassed its initial buyback amount plans – the initial buyback target for 2020 was $1.7bn, however, as of Q3, $1.8bn was already repurchased and the target was increased to $2bn. And then the current tender offer more than doubled the target, which is now set at $5bn. The CEO has stated numerous times that ATUS trades at an attractive valuation and buying shares now is a bargain (Nov. conf call):
  

  But buying back shares is not so bad either right now given how cheap our stock is on a relative basis. […] I’ve been very consistent that our stock, we find very cheap. We’re trading at double-digit free cash flow yields. That’s not immaterial when our debt — our subordinated debt between 3.5, 4x and 5x is trading in the 3s, right? So that delta continues to actually get wider because our stock historically has not reacted to that relative value. And interest rates keep on getting better and better in terms of the depth of the high-yield market. So when you’re dealing with something like a 800 to 900 basis point differential in yields, it’s very difficult to not want to buy back more shares at these levels.

• The company has seen a favorable impact from COVID (although it should be reflected in the share price already). After multiple flat or declining quarters, Q3 EBITDA growth improved to +5.5% YoY, the company’s 1 Gbps availability across its network has increased to 92% (vs 33% in 2019 and 76% in Q2’20) and 100% for its Optimum brand, which should make the company more competitive for high-speed demanding customers (wider 1Gbps coverage has been the main advantage of Optimum’s main competitor Fios). The main division, broadband, is ramping up growth with broadband revenues up 15.6% YoY in Q3, while YTD net adds are at 150k (2x increase from last year). The most problematic video services division deterioration seems to have stabilized somewhat, with gross profit remaining at $240m.

There are also certain negative aspects here, which could make one think that the company is actually properly priced or even undervalued:

• The company is highly leveraged, with net debt/adj. TTM EBITDA at 6x. This is already substantially above the peers, while the transaction is actually expected to increase the debt even more. ATUS expects to finance the tender through cash on hand and borrowings under the existing credit facility. As of Q3, cash was reported at $119m, so it seems that the majority of the funding will be done through debt.
• The company trades slightly below its peer Charter Communications (CHTR). EV/adj. TTM EBITDA stands at 10.33 (ATUS) vs 11.57 (CHTR), which given a higher growth and considerably lower leverage (4.34x) of Charter, doesn’t look cheap at all.

 

Altice USA

ATUS IPO’ed in 2017, raising $1.9bn at $30/share ($22bn valuation).

The company is one of the largest cable providers in the US, offering broadband, video, mobile, proprietary content, and advertising services to over 5m customers. For several year its video and mobile services have been declining, while due to large programming costs, the video segment is expected to become unprofitable in the future. It’s main and largest division is broadband, with the two closest peers being Charter (CHTR) and Comcast (CMCSA).

The two main brands of ATUS are Optimum (previously Cablevision, acquired in 2017 for $17.7bn) and Suddenlink (acquired in 2015 for $9.1bn). Optimum is located in more premium areas like Long Island, The Bronx, NJ, and certain NY suburbs with its primary competitor being Verizon’s Fios. Suddenlink is concentrated in the south – Texas, Louisiana, Arkansas, etc.

More background on the firm can be found here.

Aside from Mr. Drahi, other large class A shareholders include Goldman Sachs (10%), Vanguard (7.9%), Soroban Capital Partners (7.3%).