Broadband company Altice USA (NYSE:ATUS) got off to a good start with its Thursday IPO, the second-largest of the year behind Snap's (NYSE:SNAP) gargantuan IPO. Altice raised $1.9 billion by selling 63.9 million shares at $30 apiece according to CNBC, and the price fell in the upper half of Altice’s expected $27 to $31 range. As of early Monday morning, the stock has risen to a price of $34.30 after reaching a high of $35.29.
All of this is good news for Altice, but is it enough to beat long term concerns of cord cutting and a changing cable industry? Perhaps, but it is not enough to beat the concerns which relate to Altice directly. Altice is unprofitable and its potential to expand remains limited, and it is simply too early to speculate that its future will be roses. Investors should pass for now, but pay attention to whether Altice can make the major acquisitions it desires.
Changing Cable Times
Altice USA is a subsidiary of European telecoms company Altice (AS:ATCA), and is much younger than its larger peers of Comcast (NASDAQ:CMCSA), Charter Communications (NASDAQ:CHTR) (which owns Time Warner Cable), and Cox Communications. Altice purchased two cable companies, Suddenlink and Cablevision (NYSE:CVC) in 2015 and 2016 respectively, and then merged them to form Altice USA.
Altice USA stated in its IPO filing that it has “4.9 million residential and business customers” in 21 states, though the majority of them are concentrated in New York and Texas. However, Altice had a net loss of $76 million in the first three months of 2017 along with losing over $831 million in 2016 and $190 million in the first three months of 2016. Altice can thus point out that its bottom line is improving, but it still remains in the red.
Investors may also be wary of Altice and other cable companies due to the rise of cord cutting and the ongoing decline of cable television subscribers. These fears, while concerning, are overstated. Altice’s Pay TV revenue managed to slightly increase from the first three months of 2016 to 2017 from $1.05 billion to $1.07 billion. And while cable providers may be squeezed by declining subscribers if they cannot find a solution, they still have a steady business in broadband which will continue to grow in demand.
How will it grow?
But even if Altice will not be negatively affected by cord cutting, it still needs to expand and improve operations if it wants to become profitable and compete. And there are serious questions about how Altice will accomplish that.
This is especially so because while Altice can point out that its bottom line is improving, it faces a massive debt burden thanks to its earlier acquisitions. Altice has $36 billion in total assets, but a staggering $24 billion in debt.
Altice says that the proceeds it raises from this IPO will help pay off the debt, but $1.9 billion is obviously nowhere near enough. In fact, Altice will not be getting anywhere near that amount of money. Deadline Hollywood points out that it will only be getting 19 percent of that $1.9 billion, with the majority of it going to Altice’s past investors in BC Partners and the Canada Pension Plan Investment Board.
Altice’s need to service that debt will impact its ability to grow elsewhere. Altice became the fourth-largest American cable company through making sudden acquisitions at the cost of a burdensome debt load, and it appears to be planning to double down on that strategy by making further acquisitions. While there are small regional competitors whose acquisition could enlarge Altice’s profile, the big potential prize is Cox Communications. A merger between Cox and Altice would create a strong competitor to Charter and Comcast.
But Cox has expressly indicated that they are not for sale. Even if they were, there are rumors that Charter is interested in merging with Cox as well. And even if Cox chose to merge with Altice, such a move is too long-term to fully understand how it would play out.
Consequently, the prospect that Altice can grab an acquisition which would immeasurably boost its profile remains unlikely. For now, Altice remains an unprofitable company with a massive debt load that is stuck competing against larger peers.
Watch and Wait
Altice’s bottom line numbers are improving and it has grown rapidly through making acquisitions. But while these facts may intrigue some investors, its current unprofitability and high debt load should scare them away. While cord cutting may not doom cable, the industry is in a transitional phase and now is not the time to bet on an emerging company. If Altice’s bottom line numbers can continue to improve, then investors may consider giving them a chance. But that is no reason to make a move now.
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