Altice could be prepping a bid as high as $185 billion for Charter Communications—but getting Charter to the table could require the services of Sprint, Comcast and possibly T-Mobile, in a megapartnership that would lift all boats, according to analysts.
Altice has a market cap of around $23 billion plus $22.6 billion in debt, while Charter is worth $180 billion (including debt, excluding any takeover premium). This casts doubt on whether the European conglomerate has the balance sheet needed to entice shareholders at No. 2 U.S. cable company to consider a deal. The most concerned of those shareholders is likely to be Charter’s biggest investor, Liberty Broadband and its chief, John Malone.
A New Street Research investor memo noted that Altice could fix this by teaming up with strategic investors—specifically, Tier 1 players in the communications sector. Or rather, several of them.
“We think the prospects of a transaction depend entirely on whether Altice can field an offer that would make sense for Malone,” New Street Research explained. “[Altice CEO] Patrick Drahi would have voting control, despite potentially having less than a third of the shares. An offer Malone believes is worth at around $600 per share, paid in an equity that compounds at a similar rate to his Charter equity could be compelling enough for Malone to cede control. Altice would need to fund a significant portion of the offer to public shareholders in cash for it to be accretive to them. This would likely require them to bring in a partner. The most compelling would be a strategic partner like Softbank or Comcast.”
The firm noted that in addition to funding (through the Vision Fund), Sprint and its parent SoftBank could bring access to Sprint’s infrastructure in a network sharing arrangement.
Sprint is an “interesting partner because of the complementarity of their 2.5GHz spectrum with cable’s infrastructure (the spectrum is very valuable; you need access to its fiber infrastructure to unlock its value),” the analysts noted. For Sprint, whose owners are looking for a strategic deal for it, there’s plenty of upside. New Street said that Sprint has roughly 13% market share today, and this isn’t growing much. Armed with an industry leading product and a lower cost structure, this could easily double.
“We could imagine a transaction where Altice acquires Charter; SoftBank provides funding to help get the deal done, taking an equity stake in the combined company in the process, and; Sprint and the cable companies agree to a network-sharing deal that would give both access to the other’s networks at compelling economics…The value creation opportunity should get everyone’s attention.”
Those compelling economics would become even more so, they added, if the rumored T-Mobile-Sprint tie-up goes forward.
“In fact, the killer finale would be a combination of Sprint and T-Mobile USA,” they said. This is obviously good for Sprint and TMUS, but it would be good for the cable partners too by giving them access to a better network faster (they could leverage both Sprint and TMUS’ networks in Google Fi fashion until they are properly integrated). The network sharing deal with cable would improve the odds of Sprint / TMUS being approved because it would establish cable as a permanent and well-positioned new entrant with sustainable economics.”
But that’s not all: New Street envisions Comcast playing a role too, which would make the network sharing agreement far more valuable for all involved if Comcast participates.
“Comcast is transforming itself into a company focused on innovation with development teams working to create new products and a better content experience for consumers,” New Street said. “Imagine what they could create if they had access to a differentiated wireless network, with control over the product and experience at the network level, with owners’ economics.”
In short, a multipronged investment/megamerger could create immense value and deliver things that all involved would want, the analysts concluded. But it remains to be seen if Charter would be interested—Sprint and SoftBank recently approached it about an acquisition, which it solidly rebuffed.