Those who are familiar with Patrick Drahi describe him as a cunning and meticulous strategist. However, creditors battling the French telecom billionaire seem to believe the Moroccan-born businessman is ill-prepared for battle. Which side is correct could ultimately decide who owns a key portion of the transatlantic Altice enterprise, which is currently struggling due to debt of $60 billion. Drahi has the better odds.
The sixty-year-old is the European equivalent of John Malone, the renowned "cable cowboy" who succeeded in taking over financially sophisticated pay-TV companies in the US. Drahi owns stakes in the media, telecommunications, and internet companies in France, the US, Israel, and Portuga, as well as a fourth of BT, the $14 billion British company, and the auction house Sotheby's.
The problem is that Drahi aggressively borrowed to build his enterprise. The net borrowings of privately-owned Altice France by 2023 exceeded its EBITDA production by 6.4 times. It is 4.7 times at Altice International, which has operations in Israel and Portugal. The majority of big European telecoms operate with far less leverage.
Valuations are currently at an all-time low. Drahi's two continental operations appear to have no or little equity value, given that the European telecommunications industry trades at slightly more than 5 times the EBITDA last year, based on LSEG statistics. He owns approximately half of the listed cable firm Altice USA, whose market capitalization plummeted from $20 billion in 2020 to about $1 billion.
The majority of Drahi's operating cash flow from his European enterprises already goes toward paying interest. And that's with an average weighted interest rate of 6%, which is relatively benign. Large debts are due in 2027; if they are able to borrow money, they will need to refinance at significantly higher rates.
The French business is the most affected, and last month Drahi revealed his plan to turn the tables there. Bondholders may have to take haircuts in order to reduce debt to four times EBITDA. This means reducing the unit's $26 billion debt load by over $10 billion. Drahi had earlier outlined a strategy to reduce borrowings by disposing of some assets. He is now suggesting that loan holders bear all the suffering instead.
Hard cell
The creditors have organized into two main groups in preparation for battle. One group is mostly made up of secured debt holders, with a total face value of about $22 billion. The other includes more unsecured creditors, totaling $4.5 billion in debt. They both believe they can make Drahi heel. Essentially, they are arguing that if Altice France goes bankrupt, his asset reorganization will expose him to criminal culpability on a personal level under French law. In that case, a judge might rule that Drahi had misused company property.
Creditors believe that if Altice France as well as its lenders cannot agree, Drahi will likely want to avoid a court-mandated restructuring process. With the extreme leverage of the corporation, he would most likely lose his ownership in the company.
However, Drahi possesses a number of powerful cards. Unsecured creditors, on the other hand, have good reason to stay away from a court-mandated restructuring process since that would put them at risk of losing everything. This is because secured debt of the company alone is worth 5.3 times its EBITDA in 2023, which exceeds a reasonable valuation multiple for the slowly growing company.
The tycoon also has bargaining power with the secured creditors. By making use of a clause in the debt documents of the company, he is actually threatening to embezzle the revenues of selling Altice France's assets, which might total at least $6 billion. This enables a borrower to transfer funds or entire companies out of the creditors' grasp. According to CreditSights analysts, Drahi's Altice France container may have carried $20 billion, as the basket's maximum capacity develops over time.
For secured creditors, the risk is that Drahi will keep moving assets out of reach of senior bonds, which will lower the security value they have.
Ample bandwidth
For everyone, a compromise is the most sensible solution because of these factors. Bond prices indicate the potential concessions that borrowers would have to make. The current market prices for Altice France's different secured credits range from 70% to 90% of face value, while the prices of its unsecured notes are between 30% and 40% of par.
Drahi might profit from the gap by purchasing unsecured debt of Altice France at a reduced price and exchanging the secured notes for bonds with a smaller face value. That would put him well on his way to reaching his new leverage goal. In order to further reduce debt, the tycoon might then release those remaining asset-sale revenues. He would give his struggling enterprise some worth in the process. Assuming a five-fold valuation and a net debt reduction to 4 times EBITDA, Altice France's equity would be valued at over $4 billion.
Drahi would still face other issues even if he succeeded in pulling off such a manoeuvre. Refinancing those borrowings when they mature would be more difficult if Altice France's creditors were to be intimidated. This would also affect Altice USA and Altice International. Still, he doesn't have any other choices. Furthermore, the belief that loan markets would be available to him when he needed was the foundation of Drahi's whole credit-fueled purchasing spree. Thus far, his insights have proven accurate; however, it is too early to conclude that investors' memories have become longer.