BREAKINGVIEWS-Altice’s Patrick Drahi limps on from debt disaster

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By Liam Proud

LONDON, Feb 27 (Reuters Breakingviews) - Telecom tycoon Patrick Drahi started last year with a probably worthless stake in his highly indebted Altice France. Now, the Moroccan-born billionaire has escaped with his control intact and a slug of valuable equity. It’s not the most egregious restructuring ever, but the deal announced on Wednesday still commits the heresy of burning creditors without zeroing shareholders. The risk for Drahi is that the rest of his global cable-to-mobile empire may now face higher borrowing costs.

Privately-held Altice France spooked investors last March by stating that debtholders would have to take some pain to bring down its leverage. Wednesday’s announcement represents the culmination of that process. Secured creditors, who lend directly to Altice France’s operating unit, agreed to receive 87% of the face value of their claims, in the form of new debt and cash, plus a 31% stake in the company. Holders of the riskier unsecured borrowings recover 25%, plus a 14% equity holding and other add-ons. Drahi now has just over half the shares. Debt has fallen to 4.6 times EBITDA, compared with 6.4 previously.

It’s a good outcome for the Sotheby's auction house owner. Value Altice France at 5.5 times 2024 EBITDA, and the operating business is worth over 18 billion euros. Factor in a stake in broadband operator XpFibre, worth at least 2 billion euros according to people involved in the debt negotiations, and the total enterprise value is more than 20 billion euros.

That implies almost 5 billion euros of equity value, based on the new reduced leverage level, of which about 2.5 billion euros will go to Drahi and his fellow pre-deal shareholders. The same calculation implies his equity was worthless before the debt cut. In other words, the tycoon has boosted his net worth at unsecured creditors’ expense, without putting any new money in and while also keeping control. In theory, debtholders should only lose out after shareholders get wiped out.

That’s not always how it works these days, because of loose bond documentation, which gives shareholders like buyout groups the ability to move assets away from creditors and force the lenders to take a loss. Drahi implicitly threatened a similar move last year. He also had bargaining power because of Altice France’s lack of short-term maturities, which meant debtholders would have had to wait years before trying to seize the company if he defaulted, during which time its performance could have deteriorated. Lastly, creditors may also be hoping that giving Drahi a stake will encourage him to sell the business to a healthier player, like Xavier Niel’s Iliad.

The question now is what happens at Altice USA ATUS.N and Altice International – Drahi’s other global units, which have about 32 billion euros of net debt between them. Those businesses’ bonds generally yield over 10%, according to LSEG data, which is unsustainably high. If credit investors start to worry that the same kind of treatment could await them as in France, they may be even more reluctant to keep bankrolling Drahi’s global businesses.

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CONTEXT NEWS

Altice France on February 26 announced a deal with creditors that would cut the group’s net debt to 15.5 billion euros from 21.3 billion euros previously.

Secured creditors would get 87% of the face value of their claims, in the form of new debt and cash payments, as well as an additional 31% equity stake in the telecommunications group. Unsecured creditors would get a 25% recovery through new debt and cash, and a 14% equity stake.

The deal would take the ownership of existing shareholders, including founder Patrick Drahi, down to 55%.