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Altice Europe: One 2019's Most Exciting Ideas

|Includes: Altice Europe N V (ALLVF)

Altice Europe owns France's 2nd largest telecom operator.

The company is operating a spectacular comeback that the market has not noticed.

Additionally, the possibility of the French telecom sector consolidating is a great opportunity for Altice.

Altice Europe N.V is a telecommunications group owned by French billionaire Patrick Drahi, that operates under different brands in France, Portugal, Israel and the Dominican Republic. The stock 75% dip in 2018 is due to Altice’s American business being spinoff. As of January 2019, Altice Europe trades at ~$2 dollars a share, valuing the company at $3 billion dollars.

Today, the company’s market cap is $3 billion dollars with $50 billion of liabilities spread across a myriad of subsidiaries.

To explain how this turnaround will occur we first have to understand how :ALLVF got here.

Mr. Drahi acquired SFR, France's second largest operator, in November 2014 for 23 billion dollars. He then merged SFR with Numericable, his french cable business to form a cable and mobile provider. In the first three years of Drahi's leadership, SFR lost more than 1 million clients sending the stock price crashing down. Many investors who had happily rode the Drahi-acquisition wave were becoming more and more bearish on his ability to turnaround SFR which was acquired at a significant premium and which represents 71% of Altice Europe's revenue. Additionally, since a fourth operator joined the French market in 2012, the French telecom sector has been struggling due feroce competition between the four companies.

On November 21, Altice announced that SFR has recruited 1 million new clients across its mobile and cable offerings YTD which as many as it lost since Drahi took over. You would expect the stock price to soar back up on this news, but the stock has stagnated at $2 for a couple of weeks. Analyst point out the ARUP drop as the main reason of the caution they recommend on this stock. However if you look at any business when you try to acquire a significant pool customers one of the only ways is to lower prices which hurts your bottom line in the short-term. The other ways to attract customers is buy differentiating your product and that is exactly what Altice has done.

Altice plans to cut down on this promotions, but I believe they will still be able to recruit 500,000-1 million new clients this year because they have a superior product. SFR is at the forefront of content convergence which is the only way to continue to attract customers without sacrificing your bottom line. SFR has acquired the rights of the most prestigious European sport's rights (UEFA Champions and Europa League and English Premier League) which are broadcasted on Altice's sports channel RMC Sport. Customers can chose to subscribe for 19 euros per month on the channel's OTT platform or SFR customers can have RMC sports added to their cable box for an extra 9 euros per month . "Football" is by far the most popular sport in France and even more so with the recent World Cup victory which has made young players like Kylian M'bappé (Paris Saint-Germain) superstars in France. Their no doubt that France will want to see their hero advance through the Champions League which means becoming an SFR customer or paying 19 euros per month for the OTT service.

Altice’s turnaround could not take place at a better time, due to massive investments needed to transition to 5G and the low EBIT of the four companies, they have asked regulators for the possibility to return to three operators. In 2019, France’s four operators will start discussing with regulators about the possibility of returning to only three. The French government absolutely wants to develop its 5G network as President Macron continues to try to attract tech to France.  This conversation could prove especially interesting for Altice because its CEO Patrick Drahi is the only person who could be interested in selling his business to the 3 other operators. Orange, the partially state-owned market leader, will never leave the French market. For Free and Bouygues Telecom, the French market represents by far their largest and most profitable business, so they will not want to sell. This leave Altice in a great position because they do not need their French business, they can just take a huge offer and walk with the cash and focus on their American business. As Altice’s customer base grows throughout 2019 its value and strategic relevance for its competitors to buy it will grow.

Disclosure: I am/we are long ALLVF.