(Bloomberg Gadfly) -- "The Future Begins Today." With that triumphant slogan, billionaire Patrick Drahi hailed his deal to acquire SFR in March 2014.
Eight months and a bidding war later, he closed the deal to buy the French telecommunications company, paying Vivendi, SFR's then owner, 13.5 billion euros ($14.4 billion) plus a big slug of shares in his publicly-traded acquisition vehicle, Numericable.
Two years on, the bright future Drahi outlined hasn't yet materialized. SFR -- as the combination with Numericable was renamed -- is still mired in a painful turnaround that may take another two years to complete.
The goal of creating a strong second player to market-leader Orange SA hasn't been achieved. Put off by poor network quality and at times confused branding, customers have left in droves, sending revenue lower -- even as profitability has improved.
There's no doubt the transaction exemplifies Drahi's ability to cut costs. His team achieved nearly two-thirds of the promised efficiency savings in the first year by ripping out old IT systems, removing managers and squeezing vendors. Ebitda grew by almost 650 million euros in the first 12 months under his control from the companies' combined total of 3.1 billion euros in 2014. The Ebitda margin has widened to almost 40 percent in the most recent quarter from 27 percent in 2014.
Further savings are promised, with a plan to lay off one-third of the staff next year. And SFR has actually raised its long-term its Ebitda margin target to at least 45 percent.
But as profitability has improved, the business has shrunk. SFR has lower revenue, fewer customers, and poor customer loyalty -- it has a higher churn rate among its customers than many rivals. It comes last in customer satisfaction surveys and tops customer complaints to the regulator.
SFR was already suffering from under-investment at the time of acquisition. To his credit, Drahi has upped network investment by 800 million euros over two years. He has also sought to boost the appeal of SFR's packages with premium content like English Premier League soccer.
This may explain why SFR shares have given up so many of the gains they made in the early excitement around the deal. They've fallen 60 percent since March 2015.
Drahi has his fans in the investor community. They see him as a younger cousin to U.S. cable billionaire John Malone who built an empire through aggressive debt-backed acquisitions. But longstanding minority shareholders in the old Numericable haven't done brilliantly -- and because of Drahi's financial engineering, the billionaire has fared much better.
A shareholder who subscribed to the 4.7 billion euro stock offering Numericable used to fund the deal and later reinvested the dividends would, by Gadfly's calculations, have enjoyed a gain of almost 25 percent since March 2014.
Orange shareholders have enjoyed a near 70 percent total return over the period, while the benchmark CAC 40 Index has returned about 14 percent, according to Bloomberg data.
But the gains for Drahi have been better thanks his use of leverage -- he works in a similar way to a private equity firm.
Altice, the holding company for Drahi's telecoms holdings, owned 75 percent of Numericable in early 2014, a position worth 2.8 billion euros at the time. That has become an 83 percent stake in SFR worth 8.8 billion euros.
Altice financed the increase in its stake by borrowing money and repaying it with SFR's dividends. It also issued about 600 million euros of Altice stock (which it swapped for shares in SFR) and borrowed 3.5 billion euros to subscribe to Numericable's rights offering. Deduct these costs from the current value of Altice's SFR stake and the paper gain is still about 1.4 billion euros -- a 50 percent uplift.
Nevertheless, Drahi's approach has drawbacks. Altice holds a stratospheric 49.2 billion euros in net debt and SFR's leverage is higher than most of its European peers. This year alone, SFR will use nearly half of its free cash flow of 1.5 billion euro to service the interest on its debt.
It's still early days. Most telecom takeovers take three to five years to deliver on their promises. Drahi has made much of the gains from operational efficiency -- but these are at risk being eaten away in the viciously competitive French telecoms market. He needs to prove he can actually grow the business, otherwise the future may never arrive.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.