Market Insight

Altice moves west, buying controlling stake in Suddenlink

May 22, 2015  | Subscribers Only


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European based major telecom operator, Altice, is entering the US pay TV market in a big way, by acquiring the nation’s 7th largest cable operator, Suddenlink for $9.1 billion. Altice hints at further acquisitions in the U.S., a move that which would lead to further consolidation in the cable market.

Suddenlink, which mainly serves rural areas, has 1.13 million video subscribers and 1.45 million customers spanning 17 states (96% of its customers are located in 10 states). Like the rest of the major cable operators in the U.S., Suddenlink was not immune to video competitive pressure and in 2014 lost 37,000 video customers, but thanks to high speed data, increased total RGUs by 99,600 (with the help of a small cable acquisition in 2014). With a boost in RGUs, Suddenlink managed to grow its total revenue 6.75 % in 2014 reaching $2.33 billion, posting a net profit of $19.4 million in 2014, compared to a loss of $48.4 million in 2013. Suddenlink’s latest Q1 2015 results show that its video subscriber losses have minimized after an surge in video losses due to its carriage renewal impasse with Viacom resulting in dropping all Viacom channels from its line up since October 2014.

This is not the first time a foreign company has decided to enter the U.S. pay TV market. In 2012, Canadian cable company, Cogeco, acquired mid-size cable operator Atlantic Broadband for $1.3 billion to set up a presence in the U.S., however it hasn’t made any further acquisitions. Altice, on the other hand, is making a big splash by entering the U.S. market by acquiring Suddenlink, and it is not looking to stop there. There are already speculation and unconfirmed reports that Altice is looking into acquiring Time Warner Cable, which has since become available after push back from federal regulators caused the Comcast/TWC deal to fall through.

Altice will take a controlling 70% stake from Suddenlink owners BC partners and CPP Investment board, which will hold on to the remaining 30% stake. Altice will finance the acquisition with $1.2billion in cash, $6.7 billion of new and existing debt and $500 million vendor loan note from BC partners and CPP investment. The deal is expected to close in Q4 2015, pending regulatory approval.

Our analysis

Another one bites the dust, or so the saying goes. By purchasing the controlling interest in Suddenlink, Altice has removed another larger cable operator from the board. For Altice the move fits into a larger strategy of expanding beyond France. For Suddenlink's customers, the move represents possible changes in direction, a possible reunification with Viacom which the company dropped in Q3 2014, or a move toward a more a-la-carte/skinny bundled future. Regardless of whether or not the company changes direction, one more prime target for cable consolidation is off the table in the USA.

A possible re-unification with Viacom networks for carriage in standard channel packages may be one result of the acquisition. Suddenlink did experience a certain amount of backlash in Q4 2014 when the full effect of the loss of Viacom channels could be quantified, the loss of 32,600 subscribers. However, to lend weight to Suddenlink's position, in Q1 2015 the company lost 6,400 subscribers, indicating that Viacom's networks are losing relevancy for Suddenlink's remaining subscribers.

If changes are in the wind, another possible direction Altice could take Suddenlink is toward a more a-la-carte future. It has experience with a-la-carte, Suddenlink's soon to be French sibling Numericable has a significant a-la-carte offering. A complete move into the a-la-carte space isn't likely, rather for the company, it makes more sense to pursue a strategy similar to that of Verizon, skinny bundles.

The US TV market is going to represent a significantly different experience for Altice. In Europe and the Caribbean, license fees remain at relatively low levels, compared with those in the USA. Also, differences in the makeup of TV households will be noticeable. In the USA, far fewer households rely upon the free solutions of DTT or satellite. Europe may be characterized as being a less mature pay TV market, when compared with the USA.

Altice is looking to expand its global portfolio of companies, and Suddenlink is a decent place to start in the USA. The company is neither characterized as being near the front of the pack, nor toward the end of the pack, when thinking about technology and execution. Rather, Suddenlink is perceived as a very middle of the road major cable operator who is transitioning its business from a reliance upon video toward HSD.

Rumors abound about a possible offer for TWC by Altice. Certainly the failed bid by Comcast for TWC lends credence for that line of speculation. If Altice were to make a successful bid for the company it would face several challenges that Comcast would not, unlike Comcast it may have a much easier time at the regulators because it doesn't present the same problems of monopoly. IHS believes that making a first step with a mid-size major operator like Suddenlink is a good first move for a company who wants to enter the US pay TV business, however, it may be more difficult that anticipated.

When Cogeco bought Atlantic Broadband back in Q3 2012 it seemed like the company would shore up it's Canadian operations with a subsidiary in the US. For the most part, Cogeco has been successful, quarterly losses for the most recent two quarters have averaged 0.43% of its total subscriber base, having been on a trajectory of improvement since the acquisition. But the US is a difficult TV marketplace, and Cogeco like other US cable operators, is struggling to get back to positive video subscriber growth.

For Altice the purchase of Suddenlink is an opportunity to grow its multi-service portfolio, focusing around HSD. While no US cable operator has been successful launching a wireless play, Altice's experience may lend itself well. The US television business is in a period of rapid transition, a new European perspective may be refreshing to Americans who have become used to the status quo.

Geography
USA
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