Altice's Business Model Will Implode Sooner Or Later

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Altice’s takeover of Cablevision will provide opportunities for Verizon’s FiOS to capture customers in the areas within Greater New York where they are the two broadband operators.

Altice’s characteristic treatment of and actions with respect to its employees and contractors will inevitably result in deterioration in the quality of Cablevision’s services and customer care.

Sooner or later Altice’s business model based on swingeing cost cuts and heavy debt loads will implode, presenting opportunities for short sellers who get the timing right.

Major financial institutions have garnered substantial fees from Altice’s series of acquisitions, so their support for Altice should not be assigned any significant probative value.

Altice (OTCPK:ATCEY) has a well-documented record outside the US of substantial cost cutting and its consequences. These cost reductions improve the cash flow of the network operators Altice acquires to help pay down the debt it incurs. But they are otherwise harmful to the interests of employees, customers, contractors and the competitiveness of the operators themselves (e.g. Altice's Business Model Is Incompatible With The Public Interest, here Reply to Joint Reply Comments of Altice N.V. and Cablevision Corporation (NYSE:CVC), here).

Altice's cost reductions are so deep that they are achieved at the expense of deterioration in services, disaffection among employees, and declines in customer bases. They also include the imposition of substantial reductions in contractually agreed payments to contractors. The latter are presented with the prospect of engaging in lengthy or expensive litigation, which their cash flows often cannot tolerate, or accepting cuts of 30% or more in the amounts they have legitimately invoiced. In the few cases that have gone to litigation in this context in France Altice has lost, which however has not stopped the practice. Evidence of these practices and their consequences was presented to regulators in the US (the FCC and the New York PSC in particular) but in the end they chose to ignore it or downplay its significance. They apparently believe that the commitments Altice has made with respect to Cablevision after months of negotiation are sufficient to ensure that the public interest the regulators are responsible for upholding and the interests of stakeholders other than shareholders, e.g. consumers, employees and contractors, will benefit from its ownership of this cable operator that owns franchises in the Greater New York area, the largest media center and financial hub of the US. The labor union CWA that had originally objected to the acquisition (and was embroiled in labor disputes with Cablevision's now preceding owners (and founders) the Dolan family) also was apparently satisfied with the conditions of future employment agreed to by Altice, presuming that they are enforceable and will be enforced.

I disagree with these conclusions. Altice has been very ingenious in finding ways around the spirit if not the letter of commitments it has made abroad about employment, the quality of the services of its acquired properties will deliver and its adherence to policies that promote the public interest. One individual - Patrick Drahi - is the sole and unchallengeable decider within Altice and his position is unassailable within its corporate structure. Some of the same (his) key lieutenants that implemented Altice's anti-employee, anti-customer, anti-contractor tactics abroad under his instructions are in charge of Altice USA.

Sooner or later comparable tactics will become visible within Cablevision, as they have become increasingly apparent within Altice's major European property SFR, the second wireless operator and leading cable operator in France. Developments and trends within SFR were illustrated in a recent report (July 28th) in the French business journal Les Echos, "Patrick Drahi veut supprimer un tiers des effectifs chez SFR (Patrick Drahi wants to eliminate one third of SFR's employees - here) with the subtitle, "La direction de l'opérateur a annoncé en interne quelques 5.000 suppression de postes" (The management of the operator made an announcement internally of the elimination of some 5,000 positions). Two passages in this article (translated from the French by the author) are especially noteworthy, namely: "A plan for layoffs will be initiated at SFR before the end of the year. But it involves the distribution subsidiaries, an activity that is separated within the group and is not covered by the agreement to guarantee employment. In all according to a union source between 1,000 and 1,500 people would be affected by this plan. Management has found a way to include SFR's salaried staff in this plan: as it envisages to regroup distribution into two units it will transfer into them 240 employees of the operator who are active in distribution." (Author's note: Mr. Drahi's or Altice's commitment to no layoffs at SFR will expire on July 1st 2017. The transfer of employees from a layoff-exempt to another category is a way to circumvent or erode even this provision. The reductions in force foreseen at SFR by 2019 reportedly amount according to a union source to 5,300, or some 37% of SFR's current work force).

Arguably Altice may even feel it will be able to operate with less regard for customers in the US than for SFR's customers since the US broadband market is less competitive than in France. In general French consumers have more choices of alternative fixed broadband providers than their US counterparts, so the latter are less able to switch if they become dissatisfied with their current provider. Nevertheless when the experiences of Cablevision or Optimum customers deteriorate as a result of Altice's initiatives, Verizon (NYSE:VZ) should be able to persuade them to switch to its FiOS service in the areas where FiOS overlaps with Cablevision.

In its arguments in favor of the Cablevision deal Altice referred on several occasions to the financing it had obtained from large, sophisticated investors and financial institutions such as JPMorgan as evidence of the confidence of the "market" in its business model. Altice glossed over the fact that its share price has decreased by about 55% since shortly before the announcement of the proposed acquisition of Cablevision. The maximum decline in Altice's stock compared to mid-August 2015 was almost two thirds as of mid-December, and it has since recovered somewhat. Altice's financial backers have benefited from substantial transaction fees generated by the series of Altice's acquisitions over the past few years. Why would they want to highlight any risks or weaknesses or undesirable consequences flowing from Altice's business model that might bring this flow of revenues to an end? It is interesting nevertheless that in July 2016 JPMorgan lowered its target for Altice's share price from 19 to 15 euros (it is currently trading between 13-14 euros) and downgraded SFR from overweight to neutral and the target price for its shares from 41 to 29 euros.

Even as consumers and others suffer, investors may be able to take advantage of Altice's acquisition of Cablevision if they are short sellers and get the timing right. However at some point Altice's business model will implode. Altice's excessively aggressive pursuit of deep cost cuts leads to a meaner and not a leaner or more efficient and innovative organization. It increases cash flow to pay down debt in the shorter term but results in a loss of competitiveness and hence a declining customer base and falling revenues as well as demotivated employees and contractors who feel they have been cheated. This model is not ultimately sustainable.

Supporting Documents

  1. FCCAlticeCablevisionMFRConsultingReply.pdf
  2. FCCAlticeCablevision15-257_12-07-2015_MFRConsultin...

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I opposed the acquisition of Cablevision by Altice in filings with regulators on my own initiative. I received no compensation in any form for the research and analysis involved.