Watch Out for the 'Altice Way' of Doing Business
Wall Street Journal
by Stephen Wilmot
Altice’s unusual practice of charging its subsidiaries management fees is a warning sign for investors considering its upcoming IPO
Investors tempted to buy into the shareholder democracy of soon-to-float cable company Altice USA would do well to recall Alexis de Tocqueville's warnings about the "tyranny of the majority."
Altice NV, an Amsterdam-listed telecom group controlled by Franco-Israeli billionaire Patrick Drahi, posted an IPO prospectus for its $20 billion U.S. subsidiary last month. Altice USA's recent acquisitions, Optimum and Suddenlink, have been performing well, paving the way for fresh deals. Its private-equity minority shareholders want to sell some of their stakes. The IPO will attract new shareholders while giving the company a currency for more acquisitions.
But Altice NV, which owns 68.8% of Altice USA, will remain the majority owner. This is where risks emerge, judging by how Mr. Drahi treats minorities elsewhere in his empire.
Altice NV also owns a majority stake in Paris-listed SFR, the second-largest French mobile provider. Last September, the parent company tried to buy out SFR's minority owners, offering Altice stock worth just 3% more than SFR's most recent share price. Enough investors complained about the wafer-thin control premium and opportunistic timing--SFR shares had fallen 45% over 12 months in a vicious mobile price war--that the French financial markets regulator weighed in. The watchdog isn't allowed to take a view on deal pricing, but in a very rare move vetoed the deal on the basis of incomplete information.
Specifically, the regulator said a fee Altice was planning to charge SFR for the use of its operating model, the "Altice way," introduced ambiguity into the valuation. Altice withdrew its offer, but nonetheless clarified that it "expected" this fee--which hasn't been finalized--to be between 2% and 3% of SFR's annual revenue. That works out at between EUR220 million and EUR330 million, based on consensus forecasts for 2017 sales.
Given the planned IPO of Altice USA, such substantial management fees deserve close attention.