Altice's debt is a risky bet. Patrick Drahi's telecommunications company is burdened with a $60 billion debt, escalating borrowing rates, and a corruption inquiry. Even with the present high yields, the bonds of the company remain a dangerous investment.
Drahi's debt difficulties are a story of daring ambition. The 59-year-old Moroccan-born child of two math teachers who emigrated to France when he was 15 years old utilized cheap debt to purchase cable businesses throughout Europe and the US. Today, Drahi's telecom holdings are divided across three organizations, all of which he controls or fully owns: a French company, an international company covering Israel and Portugal, and Altice USA. A corruption investigation into the company's procurement methods has undermined his reputation as a decisive cost cutter, with Armando Pereira, Drahi's right-hand man, placed under home detention. Altice claims that it's the victim in this scandal, and Drahi has stated that he is feeling "betrayed". According to Pereira's lawyer, he denies doing anything wrong.
Altice was already under stress owing to rising interest rates even before this scandal came out in July. Altice International, which is operating in Israel, Portugal, and the Dominican Republic, is the most successful of Drahi's European holdings, with sales increasing 4.6% yearly in its second quarter. The greater concern is France since it has borrowing equal to six times its trailing EBITDA. It is confronting a pricey fiber deployment as well as tough rivalries from Orange, Bouygues Telecom, and Xavier Niel's Iliad.
Altice France's revenue decreased by roughly 3% year over year in its second quarter, while EBITDA fell by 5%. After deducting investment, tax, interest, and working capital changes, its cash flow turned out to be negative. Higher rates of interest would exacerbate the debt burden: the unit's average cost of borrowing was under 6%, but even its safest bonds, secured by the division's telecommunications assets, now yield approximately 9%. Altice France's non-secured bonds, offered by its holding company, seem even worse off: notes due in 2028 were valued at less than 40% of par value on Monday while yielding more than 30%.
It will take time to fix France. Drahi will thus have to sell assets in order to reduce debt, which begins to come due in 2025. He does have options. According to bankers, Altice France and Altice International are both attempting to sell their data center assets, which can raise 700 million euros. And also there is Altice's media subsidiary, operating the 24-hour news channel BFM TV. This might be worth around 500 million euros.
However, Altice France itself has $19 billion in debt due by 2029. As a result, Drahi might need to place his family silver on the table, like his 50% ownership of the French fiber business. He sold a 49.9% share in that XpFibre unit in 2018 for a price of 1.8 billion euros. He might also consider selling Altice's share in Teads, the advertising business, which was planning a $5 billion IPO in 2021. He could opt to raise money from a fund of private equity as his last resort.
But timing might not be on Drahi's side. As a forced dealer, he will have difficulty negotiating a reasonable price for those assets. Furthermore, the corruption issue may stretch on, discouraging possible bidders.
The high rates on Altice's debt may entice risk-taking investors. If Drahi is able to fix France and then sell assets, the stock market may quickly rebound. Nonetheless, the mogul is known as a cost-cutting and financial engineer rather than a turnaround expert. Creditors have to believe Drahi is capable of pulling one more rabbit out of his hat.