ATUS - Altice USA

[Gamecock-YT]

 

"Morris Broadband is a rapidly growing broadband communications services company providing high-speed data, video and voice services to approximately 36,500 residential and business customers in western North Carolina. As of December 31, 2020, Morris Broadband passed approximately 89,000 homes throughout growing communities including Hendersonville, Franklin, Sylva, Nebo and West Jefferson with broadband penetration of approximately 35%."

 

Maybe since I'm familiar with the area, but there's something kind of strange with their layout....Franklin isn't anywhere close to West Jefferson. It's more like a shotgun approach to towns vs. being interconnected. Maybe they can keep growing, there's quite a few towns in western NC that are still reliant on satellite TV & internet.

[KJP]

35-minute interview today with Altice USA CEO (no specific discussion of Morris Broadband, which, at the end of the day, is essentially irrelevant given the overall size of Altice):  https://www.cnbc.com/2021/03/01/altice-usa-ceo-cable-tv-will-die-broadband-and-wireless-should-merge.html

 

It's pretty consistent with what's generally been said here and the Charter thread. 

 

 

[KJP]

 

50% penetration by 2022 is a fantasy. Just look at Suddenlink's growth rates. Having said that, there is likely to be single digit EBITDA growth by 2022 in Morris's footprint.

 

3) To what extent does "projected 2022 adjusted EBITDA" include any benefits from additional edgeouts between now and December 2022?

 

Highly unlikely. That would require additional capex by Altice and it takes a while to get the extensions built and get customers. Not gonna happen by 2022. Plus it should not be included in the EBITDA numbers for the acquisition valuation anyhow.

 

I lack your confidence in predicting the future. 

 

For example, Altice claims to be getting to 40% penetration on new edgeouts in just 12 months.  (See, e.g., slide 10:  https://s22.q4cdn.com/118672413/files/doc_presentations/2021/ATUS-Q4-2020-Results-Presentation-vFINAL2.pdf)  I do not know the various vintages of Morris's passings, nor its penetration curve, nor the competition in its footprint, though the press release described it as "rapidly growing" and "very fast growing".  But I believe one could infer from Altice's actual experience scenarios in which broadband penetration in Morris's footprint goes from 35% to 50% (or higher!) in two years, and, of course, scenarios in which it does not.

 

As for what "should not be included in the EBITDA numbers for the acquisition valuation," I was pointing out that, rightly or wrongly, Altice does not appear to be disclosing a post-synergy multiple in the same way that, for example, Cable One disclosed a post-synergy multiple in connection with its recent acquisition.  Thus, we are left trying to understand what they actually said, not what they perhaps ought to have said but did not.  I do not know, for example, how many (if any) additional passings Morris currently has under construction or has permitted nor whether the, for example, 12-month penetration rate of any such passings will be more than, less than, or equal to 40%. 

 

As a coda to this confession of ignorance, I note that the less than a year ago, Altice bought Service Electric's 70,000 passing/30,000 existing broadband customers for $150 million, which is $2,142/passing and $5,000/existing broadband customer.  With Morris, Altice bought 89,000 passings/31,150 broadband customers for $310 million, which is $3,483/passing and $9,951/customer.  Perhaps Altice stole Service Electric or perhaps it badly overpaid for Morris.  Or perhaps there's just a lot of juice left in Morris's current and potential footprint that will begin to show up in 2022.  I don't know what the truth is.

 

 

 

The rough economics of Charter's RDOF win appear to be:  ~1 million new passings at a cost of $5 billion before a government subsidy of $1.2 billion, for a net cost of $3.8 billion, or $3,800/passing.  According to Charter's CFO:

 

"Winfrey noted that the paybacks on the rural projects are longer than for other typical capital-intensive projects, but said the internal rate of return on the rural opportunity is in the double digits. Those opportunities also come with relatively low risk because the deployments put Charter in position to drive high-service penetrations in areas where there is currently little or no broadband.

 

"We think the returns are attractive," he said, holding that the economics are not that different from a cable M&A model, and represent a good path forward given the absence of any mid or larger-scale M&A from a cable footprint perspective." 

 

[source:  https://www.lightreading.com/opticalip/fttx/charters-rural-network-buildout-like-cable-manda/d/d-id/767918?_mc=RSS_LR_EDT]

 

As noted above, even apparently expensive M&A like Morris was only $3,500/passing and starts from ~35% penetration, rather than zero. 

 

 

[KJP]

On 3/1/2021 at 3:16 PM, KJP said:

 

I lack your confidence in predicting the future. 

 

For example, Altice claims to be getting to 40% penetration on new edgeouts in just 12 months.  (See, e.g., slide 10:  https://s22.q4cdn.com/118672413/files/doc_presentations/2021/ATUS-Q4-2020-Results-Presentation-vFINAL2.pdf)  I do not know the various vintages of Morris's passings, nor its penetration curve, nor the competition in its footprint, though the press release described it as "rapidly growing" and "very fast growing".  But I believe one could infer from Altice's actual experience scenarios in which broadband penetration in Morris's footprint goes from 35% to 50% (or higher!) in two years, and, of course, scenarios in which it does not.

 

As for what "should not be included in the EBITDA numbers for the acquisition valuation," I was pointing out that, rightly or wrongly, Altice does not appear to be disclosing a post-synergy multiple in the same way that, for example, Cable One disclosed a post-synergy multiple in connection with its recent acquisition.  Thus, we are left trying to understand what they actually said, not what they perhaps ought to have said but did not.  I do not know, for example, how many (if any) additional passings Morris currently has under construction or has permitted nor whether the, for example, 12-month penetration rate of any such passings will be more than, less than, or equal to 40%. 

 

As a coda to this confession of ignorance, I note that the less than a year ago, Altice bought Service Electric's 70,000 passing/30,000 existing broadband customers for $150 million, which is $2,142/passing and $5,000/existing broadband customer.  With Morris, Altice bought 89,000 passings/31,150 broadband customers for $310 million, which is $3,483/passing and $9,951/customer.  Perhaps Altice stole Service Electric or perhaps it badly overpaid for Morris.  Or perhaps there's just a lot of juice left in Morris's current and potential footprint that will begin to show up in 2022.  I don't know what the truth is. 

 

 

 

 

 

Slide 9 in yesterday's Q1 earnings presentation contains some interesting disclosure about Altice's recent Service Electric and Morris Broadband acquisitions:  https://s22.q4cdn.com/118672413/files/doc_presentations/2021/q1/ATUS-Q1-2021-Results-Presentation-vFINAL.pdf

Going back to the initial Morris Broadband acquisition press release, Altice bought it for $310 million and it had 35% residential broadband penetration, LQA AEBITDA of $13 million, for a 24x EBITDA multiple and a 7.4x multiple of projected 2022 EBITDA, after accounting for the present value of the tax benefits from the transaction.  It's hard to imagine that the PV of the tax benefits is more than $50 million (and that seems high to me), so Altice must have been projecting at least $35 million in AEBITDA for Morris in 2022 ((310-50)/7.4).

In the presentation linked to above, Altice says Morris had a 28% full-year AEBITDA margin.  Unfortunately, Altice hasn't disclosed (as far as I know) Morris's actual 2020 AEBITDA, only the Q4 annualized number of $13 million and that the company was "fast growing."  If we assume actual 2020 EBITDA of $12 million, that implies Morris's 2020 revenue was $43 million (12/.28).  The presentation projects 2022 AEBITDA margin of 60%, which, using the $35 million 2022 AEBITDA number estimated above, implies revenue of $58 million (35/.6).

That would imply compound annual revenue growth from 2020 to 2022 of about 16% [43 * 1.16^2 = 57.8].  I believe that that revenue growth will disproportionately come from broadband rather than video, voice, etc., i.e., broadband will make up a bigger percentage of Morris revenue in 2022 than it does today.  Thus broadband customers should increase by at least as much as revenue.  [Price increases or uptiering would complicate this analysis.]  In the acquisition press release, Altice said that Morris had 89,000 residential passings and a 35% penetration rate, which implies 31,150 residential customers [business customers presumably make up the rest of the 36,500 customers referred to in the press release].  Compounding the residential customer number at 16% (the implied revenue growth rate calculated above) over the next two years would produce 42,000 residential customers or a 47% penetration rate (this assumes no edge outs, which is probably incorrect, so may be a bit high). 

Earlier in the thread there was some discussion about the plausibility of going from 35% to 50% penetration in two years.  Based on the the analysis above, it appears that Altice is projecting close to that kind of penetration growth rate, which would be consistent with Morris having relatively young passings and the penetration growth rates Altice has disclosed for its Suddenlink edgeouts.  I think this analysis also highlights the value in new, underpenetrated passings that have low competition and relatively low present penetration, whether those passings come from organic edgeouts or M&A.