Billionaire Drahi Tries to Cut the Fiber Knot

(Bloomberg Opinion) -- With friends like these, cable billionaire Patrick Drahi must be feeling… popular. On Friday, his Altice Europe NV agreed to sell just under half its French fiber broadband operation to a group of Canadian, French, and German infrastructure funds for 1.8 billion euros ($2.1 billion).

The price looks good, and Altice gets to reduce its debt. It will also be able to fund the roll-out of ultra-fast internet connections to consumers at the dirt-cheap rates available to big infrastructure projects.

The unit being sold, which is part of Altice's SFR business in France, is in its infancy. It serves about 1 million homes, and plans to add 4 million more over the next four years. Altice doesn't disclose the operation's Ebitda, but it is likely to reflect that lack of scale.

The deal values the division’s equity at 3.6 billion euros, and Altice says the entity will have 1.8 billion euros of debt, implying an enterprise value of 5.4 billion euros. Bloomberg Intelligence puts the valuation at a "favorable” 1,080 euros per fiber home, based on the targeted 5 million dwellings in the plan. That is likely to be well in excess of the cost of connecting each household.

The market was certainly pleased: Altice stock jumped 9 percent, although the high leverage of the company means it doesn't take much to move the share price.

It's a natty piece of corporate finance. The unit will fund its capital expenditure through its own borrowings. Cunningly, the parent will retain control – but the structure means the additional debt won’t inflate Altice's own leverage. Plus funding costs for infrastructure projects are lower than Altice’s.

The flipside is that Drahi foregoes half the upside – but that's something his company simply can't afford to realize on its own given its strained finances.

Altice has raised 4 billion euros from recent disposals. But net debt stood at 30 billion euros at the end of the third quarter, or 5.6 times Ebitda, and the group’s market capitalization is roughly 3.5 billion euros.

For Drahi, the hard work of deleveraging still depends on delivering sustained operational improvements at SFR in particular. Still, his corporate finance skills still have their place: every little step helps.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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