(Bloomberg Opinion) — Patrick Drahi is on a roll.
The billionaire telecoms entrepreneur struck a deal to cut borrowings at Altice France SA in February, lifting the cornerstone of his business empire out of negative equity. Now he’s considering cashing in the company’s main asset — France’s SFR mobile-phone network.
A quickfire disposal would be bittersweet for the bondholders who just agreed to rescue Drahi from the mire.
Drahi warned in March last year that Altice France’s €24 billion ($27 billion) of net debt was unsustainable and creditors would have to take losses. Back then, net leverage was more than six times profit as measured by earnings before interest tax, depreciation and amortization. The equity value was zero or less.
A restructuring is set to cut net borrowings to just over €15 billion when it completes later this year, with subordinated creditors taking the biggest haircuts. The primary compensation? A 31% stake in the business for the senior creditors, 14% for the juniors. Drahi retained control with the rest. But the value of that equity could be about to become deliciously clear.
With the ship stabilized, Drahi can consider a full or partial sale of SFR from a position of strength. It’s certainly an opportune moment to do so. European regulators may be becoming more tolerant of mobile markets consolidating around three players. The UK is allowing Vodafone Group Plc to swallow up UK rival Three, for example. An all-French deal here would likely require SFR to be carved up in varying chunks to Bouygues SA, Iliad SA and Orange SA, as Bloomberg Intelligence suggests. Emirates Telecommunications Group Co. may also evaluate a transaction, Bloomberg News reported.
Price might be a bigger stumbling block than regulators. A deal could value SFR at as much as €30 billion, Bloomberg News reported. Even if that included Altice France’s stake in the XpFibre network, possibly worth around €2 billion, it would still represent a chunky eight times the €3.5 billion Ebitda that CreditSights research reckons the business could be making come 2027 — not outlandish but high. CreditSights’ base-case valuation multiple is five, rising to seven with a takeover premium and potentially higher in a deal with domestic synergies.
A transaction at the lower end of the range seems more achievable. That would also be a good comeback: A €22 billion deal would ink €7 billion of equity value, with nearly €4 billion accruing to Drahi.
A quick flip of SFR at a strong price would, of course, benefit creditors, given their stake. But it also raises an embarrassing question. Shouldn’t they have resisted a restructuring deal and sought to take control of Altice France and flipped it themselves? In that scenario, they would have done even better.
The snag is that there was no quick route to seizing control before 2027 when troublesome debt maturities loomed. A more combative group of bondholders might have dragged things out until that crunch point. But the creditors here are an unruly coalition of risk-averse loan funds and opportunistic hedge funds. Drahi took advantage of fears that SFR’s performance could deteriorate over time, bringing everyone to the table before it was strictly necessary.
If Drahi comes out on top, it looks like the junior creditors have done relatively well at the expense of their senior brethren, although cross-holdings blur the distinction. The junior debt didn’t obviously have any value going into the restructuring. Its holders got their lucrative equity stake effectively to buy their consent for a deal. Had they been wiped out, they could have frustrated things with legal action. The cost of cooperation will be felt when the spoils of any SFR deal are shared.
Drahi proved adept at reading the dynamics of power between him and his creditors in getting the restructuring approved. Has he read regulators’ and telecom bosses’ appetite for consolidation equally well? Probably, yes.
More From Bloomberg Opinion:
This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
More stories like this are available on bloomberg.com/opinion
