Snap Inc (NYSE:SNAP) will almost certainly finish as the biggest IPO of 2017, but there is now a new candidate for second place. Altice USA Inc., the fourth-largest cable company in the United States and a part of Altice NV based in the Netherlands, has filed for an IPO which aims to raise as much as $1.4 billion and give it a market value of up to $22.8 billion.
This large IPO is a significant change from when Altice CEO Patrick Drahi said that Altice USA was “too small” in 2015 according to Bloomberg. Altice clearly has grand ambitions and intends to grow further by making acquisitions, with speculations that it may purchase Cox Communications or other major telecom companies.
But while Altice is certainly ambitious, investors have to wonder if it can really make its dreams a reality. The need to adapt to a changing cable environment as well as Altice’s high debt load will limit its ability to expand, especially in the current business environment. Under these circumstances, the reward is not worth the risk for investors and more established players in the U.S. cable industry should be looked at instead.
Cable vs. Broadband Growth
The history of Altice in the United States is still very young. Altice NV purchased cable company Suddenlink in December 2015 and Cablevision (NYSE:CVC) six months later, then merged them and created Altice USA. Today, Altice serves 4.9 million customers in 21 states, with 75 percent of its business coming from Texas and the New York metropolitan area according to its SEC report.
Altice can point to its strong presence in two of the largest states and connection to a major overseas company as proof of its potential for growth, and an announced partnership between Altice NV and Netflix (NASDAQ:NFLX) to provide Netflix content to Altice customers in France, Portugal, and other foreign countries is a good sign of this company’s aggressiveness.
But there is a lot of flux in the cable market right now as cord cutting makes cable TV less profitable and broadband becomes more important. Altice, currently investing in building cell signal boosters to increase its market, faces a great deal of competition from larger cable companies like Comcast (NASDAQ:CMCSA) and smaller mid-level firms as well. There is also the basic problem that Altice is currently unprofitable as it finished 2016 with a net loss of $832 million, though its losses in the first three months of 2017 did improve compare to the same period 12 months earlier.
Tough Acquisition Prospects
Altice has to figure out how to become profitable while staying competitive, and it is looking at additional acquisitions to grow larger and negotiate better deals with content providers.
But while Altice clearly wants to expand through acquisitions, there is no real indication of what it intends to acquire. Despite the aforementioned speculation that Altice may purchase Cox or enter into a partnership, a Cox spokesman emphatically stated on Tuesday that “we’ve been consistent and very clear that we’re not for sale.”
There are other, less ambitious targets for Altice such as Mediacom. But Altice’s ability to fund such acquisitions should be called into question given its total debt of $24 billion. Altice will use some of the proceedings to pay off the debt, but a key thing to remember is that Altice’s co-investors BC Partners and Canada Pension Plan Investment Board will actually receive most of the money by selling their shares. Altice will get just $330 million out of the raised $1.4 billion, nowhere near enough to make an impact on that debt.
Such high debt levels are never good, but it will only get worse given the Federal Reserve’s recent decision to raise interest rates by a quarter percent. Altice USA has become the fourth-largest American cable company by financing acquisitions through debt. But now they are reaching the limits of that strategy, and it is difficult to see what their Plan B is.
Look Elsewhere
The cable industry is one in a state of flux, where a new competitor with new ideas could grow rapidly under the right circumstances. But Altice does not appear to be the right company. While it has grown through solid acquisitions, its high debt load and current lack of profitability, along with intense competition in the cable market, will limit its stock potential and should thus be avoided.
Still, Altice is on the right trajectory towards becoming profitable, and a Cox partnership, while uncertain at best, would be a game changer. Potentially interested investors should keep an eye for either of those events happening, which would almost certainly change Altice’s long-term trajectory.