Charter Communications Inc. âhas always been the natural buyerâ of Altice USA Inc., according to a Wolfe Research analyst. But could a deal actually happen?
Altice
ATUS,
+18.88%
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,
-0.90%
is working with financial advisers to look into a possible combination. Charterâs 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 donât 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 companyâs 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 âquite possibly an insurmountable leverage wall in 2027.â
âTerrible timingâ
Charterâs stock is down about 20% since the companyâs most recent earnings report, noted Bernstein analyst Laurent Yoon so, in that sense, the companyâs possible interest in a deal seems like âterrible timing.â
âBut 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,â he continued.
Yoon doesnât see capital-expenditure synergies if the two companies were to combine, but he adds there could be âpotential operating synergies in key markets where both CHTR and ATUS operate in contiguous markets with little to no overlap today.â
Further, Charter potentially could refinance Alticeâs $25 billion in debt at lower rates. But a transaction would potentially bring Charterâs own leverage ratio to 4.7 times, above its 4.5-times target, per Yoon.
âA large debt-financed acquisition could harm credit measures,â a Gimme Credit analyst wrote Tuesday, while lowering its rating to deteriorating from improving.
âSet of challengesâ
The report raised various questions, analysts noted. To start, would Charter really consider a deal, would Altice sell â and whatâs a logical price?
âWhile investors appreciate when the math works out, CHTR faces a set of challenges that it needs to navigate in the near-term,â Yoon wrote. âAdditionally, 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]â and cash flow in the near term.
Thatâs especially true given the prospect of heightened capital expenditures over at least the next three years.
As for Altice, Wolfeâs Peter Supino notes that the saga gains an added dimension from the fact that billionaire Patrick Drahi controls the company and wouldnât 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 âdecliningâ earnings before interest, taxes, depreciation and amortization (Ebitda).
âWhile Altice USAâs liberal debt covenants provide time, nearly $12 billion of debt maturities through 2028 ($7 billion in 2027) would eventually wipe out Drahiâs equity,â he wrote.
See also: Charterâs stock gets another downgrade with weak numbers that are âdifficult to explainâ
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