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Altice USA has a lot of debt. Such as $25 billion of net debt, or 6.7 times EBITDA.
This fact in itself is not usually worthy of a blog post. But it provides useful context to this week's report that Charter Communications was considering approaching Altice USA about an acquisition.
The deal's outlook is questionable for several obvious reasons, CreditSights says:
1) Regulators may not be keen on linking two companies with an overlapping presence: Optimum Cable, owned by Altice, is a large provider in the New York City area, as is Charter.
2) Any significant savings from a deal would first require “heavy upfront merger and integration costs,” so CreditSights analysts say they “will not be able to immediately incorporate a significant synergy number into our analysis of leverage and credit metrics” post-sale. Deal estimates start at $500 million.
3) Charter also has a lot of debt – $98 billion – and analysts say it is “important” for the cable operator to maintain an investment grade rating on its $54 billion of senior secured bonds.
But there's another interesting wrinkle here.
The deal will need to be structured to avoid triggering change-of-control covenants on $17 billion of Altice bonds, Covenant notes in a separate note. (Both Cov Review and CreditSights are owned by Fitch Solutions.)
If all of the company's assets are sold to people who are not “permitted holders” — namely billionaire Patrick Drahi and a handful of institutional investors/holding companies — and if a “person or group” ends up with more than 50 percent of the voting rights, the bondholders could redeem them for $101.
This will be a hefty cost, to say the least, as Altice's bonds were trading all over the map before the news (lower-rated bonds were trading at less than 50 cents on the dollar before the deal).
It's rare for a change-of-control requirement to act as a significant barrier to a deal, but overcoming this requirement may take a little more effort than usual.
Charter will likely need to pursue a direct merger rather than follow the now standard procedure of creating a subsidiary to buy it, Covenant says. This is because the subsidiary will receive more than half of Altice USA's voting rights, while merging directly into the parent company would mean distributing voting rights among Charter's many shareholders.
This is of course possible. But even if Charter jumps through this phase, it's still significant that it has a lot of debt on it and Altice USA. (Did we mention that? There are many more.) The tie-up could still easily result in a violation of other leverage covenants after it is completed, meaning it would still require redemption of the bonds. Covenant Review did not delve too deeply into this matter, as it is also skeptical about the prospect of the deal going ahead. A report this week said it was not clear whether Charter had taken any formal approach.
But until Charter “formally rules out mergers and acquisitions,” Credit Sites analysts write, “we think there may be new ground for Altice’s U.S. bonds.” Good for them!?
In-depth reading:
– Can changing control covenants hinder mergers and acquisitions?
