August 10, 2017 / 1:29 PM / 6 months ago

Charter bid would be a deal too far even for Drahi

LONDON (Reuters Breakingviews) - A takeover of Charter Communications would be a deal too far even for Patrick Drahi. The billionaire’s Altice and its U.S. arm are working on a bid for the $180 billion cable group, according to reports. The hefty price tag and Charter shareholder John Malone’s probable unwillingness to take stock with poor voting rights may scupper that.

It makes sense to combine Charter, the second-biggest U.S. cable company, with smaller peer Altice USA. The enlarged group could slash high fixed costs and have greater clout in negotiations with content providers.

Structuring the deal, though, would be hard. Imagine Drahi follows his typical strategy of loading up on debt for a cash offer and subsequently taking an axe to the cost base. The combined group could have net debt of $232 billion, assuming Altice pays a premium of 25 percent. That would be 11 times the firms’ combined 2018 EBITDA, according to Eikon forecasts. Drahi would need to more than double EBITDA to bring it down to a reasonable level, if he can raise the debt in the first place.

A mix of a cash and shares is therefore the most likely option, but even then it’s hard to see how a deal could satisfy the interests of Drahi and Charter shareholders, including John Malone, whose Liberty Broadband owns more than a fifth of Charter shares. The groups’ uneven market capitalisations mean a straightforward merger with equal rights would force Drahi to surrender control. Altice USA is more likely to offer its A-shares, which have inferior voting power. But Charter shareholders would still be left with less say in a company carrying more debt than the roughly four times EBITDA they currently have.

That would take a lot of confidence in Drahi and his cost-cutting skills. True, Malone, known as the “cable cowboy”, has called him a “genius”. Perhaps Drahi could win Malone round by offering him shares with superior voting rights than those offered to other shareholders. But Charter, which recently bought Time Warner Cable, probably has other more attractive options if it wants to acquire companies or gear itself up. It’s hard to see the cable cowboys forging a transatlantic connection.


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