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Altice USA has a lot of debt. Like $25bn of net debt, or 6.7 times Ebitda.
This fact, in itself, wouldn’t normally be worth a blog post. But it provides helpful context for this week’s report that Charter Communications has been considering approaching Altice USA about a takeover.
The outlook for a deal warrants scepticism for a few straightforward reasons, argues CreditSights:
1) Regulators may not be eager for a tie-up of two companies with overlapping presences: Optimum Cable, owned by Altice, is a sizeable provider in the New York City area, as is Charter.
2) Any significant savings from a deal would first require “heavy upfront merger and integration costs,” so CreditSights analysts say they “would not be able to immediately bake in a chunky synergy number into our leverage and credit metric analysis” for their post-deal estimates, starting at $500mn.
3) Charter also has a lot of debt — $98bn — and the analysts say it’s “crucial” for the cable operator to keep an investment-grade rating on its $54bn of senior secured bonds.
But there’s another interesting wrinkle here.
The deal would need to be structured to avoid triggering change-of-control covenants on $17bn of Altice’s bonds, as Covenant Review points out in a separate note. (Both Cov Review and CreditSights are owned by Fitch Solutions.)
If all of the assets of the company are sold to people who aren’t “Permitted Holders” — ie billionaire Patrick Drahi and a handful of institutional investors/holdcos — and if a “person or group” ends up with more than 50 per cent of the voting rights, bondholders can redeem at 101.
This would be a hefty cost, to say the least, as Altice’s bonds were trading all over the map before the news (the lowest-rated were trading below 50c on the dollar before the deal).
It’s rare that a change-of-control clause acts as a significant barrier to a deal, but getting around this one could take a bit more effort than normal.
Charter would probably need to pursue a direct merger instead of pursuing the now-standard procedure of creating a subsidiary to buy it, says Covenant Review. That’s because a subsidiary would have more than half of Altice USA’s voting rights, whereas a merger directly into the parent would mean voting rights are distributed among Charter’s many shareholders.
That is doable, of course. But even if Charter jumps through that hoop, it still matters that both it and Altice USA have a lot of debt. (Have we mentioned that? There’s lots.) A tie-up could still easily breach other leverage covenants after completed, meaning it would still require bond redemptions. Covenant Review didn’t get too far into those, as it is also sceptical about the prospect of a deal going forward. This week’s report said it wasn’t clear if Charter had made any formal approach.
But until Charter “formally rules out M&A”, the CreditSights analysts write, “we think there may be a new floor for Altice USA bonds.” Good for them!?
Further reading:
— Could change of control covenants put a drag on M&A?
