Charter appears to be the 'natural buyer' of Altice USA - but how likely is a deal right now?

By Emily Bary

Any deal announcement would arrive during tough times for the cable industry

Charter Communications Inc. "has always been the natural buyer" of Altice USA Inc., according to a Wolfe Research analyst. But could a deal actually happen?

Altice (ATUS) investors seem to be hopeful, with the stock logging more than a 60% two-day gain in the wake of a Bloomberg News report saying that Charter (CHTR) is working with financial advisers to look into a possible combination. Charter's stock has dropped about 3% over the same span.

Charter is the top cable player in New York City, according to Wolfe Research, while Altice serves about 6 million homes in the New York region and the broader northeast.

Spokespeople for Altice and Charter each said they don't comment on rumors.

Any deal announcement would arrive during tough times for the cable industry. Shares of Spectrum-parent Charter suffered their worst single-day drop on record earlier this month after the company's last earnings report revealed a drop in broadband subscribers. Cable incumbents face increasing competition from wireless companies that have ramped up their offerings in the U.S. internet market.

Optimum-parent Altice, meanwhile, also saw broadband net losses in its latest quarter, with MoffettNathanson analyst commenting at the time that the company faces "quite possibly an insurmountable leverage wall in 2027."

'Terrible timing'

Charter's stock is down about 20% since the company's most recent earnings report, noted Bernstein analyst Laurent Yoon so, in that sense, the company's possible interest in a deal seems like "terrible timing."

"But then again, these challenges, broadband growth in particular, and potential operating synergies to generate additional cash flows (eventually) may be the reason why they are assessing the potential merits of the transaction," he continued.

Yoon doesn't see capital-expenditure synergies if the two companies were to combine, but he adds there could be "potential operating synergies in key markets where both CHTR and ATUS operate in contiguous markets with little to no overlap today."

Further, Charter potentially could refinance Altice's $25 billion in debt at lower rates. But a transaction would potentially bring Charter's own leverage ratio to 4.7 times, above its 4.5-times target, per Yoon.

"A large debt-financed acquisition could harm credit measures," a Gimme Credit analyst wrote Tuesday, while lowering its rating to deteriorating from improving.

'Set of challenges'

The report raised various questions, analysts noted. To start, would Charter really consider a deal, would Altice sell - and what's a logical price?

"While investors appreciate when the math works out, CHTR faces a set of challenges that it needs to navigate in the near-term," Yoon wrote. "Additionally, taking on an additional $25 billion in debt does not bode well when investors are asking about the risks to [earnings before interest, taxes, depreciation and amortization]" and cash flow in the near term.

That's especially true given the prospect of heightened capital expenditures over at least the next three years.

As for Altice, Wolfe's Peter Supino notes that the saga gains an added dimension from the fact that billionaire Patrick Drahi controls the company and wouldn't necessarily be pressured into a fast sale. At the same time, Supino said, the clock is ticking given that Altice has about $25 billion in debt alongside $3.5 billion of "declining" earnings before interest, taxes, depreciation and amortization (Ebitda).

"While Altice USA's liberal debt covenants provide time, nearly $12 billion of debt maturities through 2028 ($7 billion in 2027) would eventually wipe out Drahi's equity," he wrote.

See also: Charter's stock gets another downgrade with weak numbers that are 'difficult to explain'

-Emily Bary

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02-27-24 1720ET

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