Altice and Numericable will go into debt of 10 billion euros to buy SFR: why the operation is high risk

by bold-lichterman

The two companies will now have to convince investors, but the Altice group is already heavily in debt …

Eyes bigger than your stomach? Numericable and Altice will finance themselves up to 10 billion euros on the markets via a bond issue with “high yield” debt securities to absorb SFR after winning their showdown against Bouygues Telecom at 13, 5 billion euros – the plan also provides for the granting of 20% of the capital of the new structure to Vivendi, the current owner of the company. In the absence of a capital increase, it is therefore a giant loan that the firms of Patrick Drahi will submit. To achieve this, the pear was cut in two: 6.04 billion euros for the cable operator, against 4.15 billion for its parent company. Faced with the scale of the task, some of the bonds will however be denominated in dollars to facilitate subscriptions to investors, all supervised by JP Morgan and Goldman Sachs.

arnaud-montebourg-2But with so much additional debt, the purchase of SFR raises many questions. Arnaud Montebourg, then still Minister of Productive Recovery, declared at the beginning of April that “this poses many problems, it is a small company which will go into heavy debt to carry out this acquisition” [en savoir plus : Arnaud Montebourg sera vigilant sur les conséquences de la cession de SFR à Altice / Numéricable, ndlr].

Because the issue underlying the takeover of the operator in the red square goes well beyond the private sector of operators and affects France’s ability to adopt and invest in future very high-speed networks, infrastructures for which France has already behind schedule and pushing for concentration in the telecoms sector to face future costs. As a result, the market is in full swing: the Briton Vodafone recently acquired the Spaniard Ono in mid-March for more than 7 billion euros, while he had already swallowed up the German Kabel Deutschland a few months earlier.

Bouygues Telecom itself, after its failed attempt to get its hands on SFR with which a network pooling agreement had been signed, could turn to other operators to ensure its future. A merger with Free – Iliad would be ready to buy the operator for 5 billion euros, where Bouygues would ask for 8 billion – or Telefónica would even be under study according to information circulating in the press [lire notre article dédié], even if Martin Bouygues refused to confirm this in his recent interview with the Figaro.

At the level of the States, same story. David Cameron and Angela Merkel announced last month, on the occasion of their presence at CeBIT in Hanover (Germany), a conference dedicated to Big Data and cloud, that Germany and the United Kingdom would work hand in hand, with several universities in support, for the development of 5G [lire notre article : Le Royaume-Uni veut s’allier avec l’Allemagne et injecte 50 millions d’euros, ndlr].

The colossal loan of 10 billion euros by Altice and Numericable therefore presents a risk because if the two companies were able to convince Vivendi’s Supervisory Board to accept their offer, they will now have to seduce investors by demonstrating that they will be able, after new debt, to still have sufficient financial leeway to carry out the investments required to meet future consumer demands. The rating agency Moody’s itself seems dubious, pointing out that the fully consolidated leverage of the Altice group is “high” with a current debt estimated between 5 to 5.5 times the EBITDA. If the agency raised Numericable’s rating, it lowered Altice’s. The two bonds, however, both remain in the “junk bond” category – literally “rotten bond” – ie high risk.