Otherwise, as management detailed, they “could well select the longer road of the organic action” – i.e wait and hope that EBITDA recovers and can deleverage the group itself. For a telco, especially one in Altice France’s position, that’s unlikely anytime soon.

“We do not want to contribute unrestricted assets to the restricted group if we’re ending up with a partial solution,” management stated. It won’t be lost on creditors that the assets sold were originally inside the restricted group, but moved out prior to the sales.

This is also a direct contradiction to management’s announced focus on ‘inorganic deleveraging by 1x within 12 months’ from just seven months ago.

When quizzed by another listener, management didn’t push back on taking any other assets out of the restricted group before their eventual sale. XpFibre (admittedly already unrestricted) and La Poste were listed as the two assets still being reviewed for sale plus “a few smaller ones”.

The call has triggered a stark sell off across the cap stack (more in a minute). From a cynical point of view, management’s staunch position opens the door to the exact thing they’re asking for: discounted buybacks.

The game theory is rife. If management announces its willingness to do buybacks, the debt trades upwards and the deleveraging impact is less. On the other hand, and the one potentially at play, they take a tough stance, the debt trades down and the asset sale proceeds have more power — ultimately meaning there is less of a need for more asset sales and potentially providing more equity value down the line.

Either way, frustrating creditors when the larger complex has €60bn of debt is unlikely to turn out to be a smart play in the long run.

See a transcript of the call on 9fin here.

The Drahi discount

As of writing we note an almost 20 point drop in the €500m SUNs due 2028. This downward decline is consistent with the rest of the unsecured debt in the wake of management “expecting the market to participate in discounted transactions” to facilitate Altice France’s leverage target of less than 4x.

The secured debt has followed suit but, as would be expected, to a lesser extent. The impact of the call on the SSNs spread-to-worst can be seen in the charts below.

Organic releveraging?

Compounding the issues provided today, management announced FY 24 guidance which sees revenue decline “notably” YoY and a mid-high single digit decline YoY in EBITDA.

FY 23 pro forma EBITDA of €3.785bn is provided in the results release which accounts for the two asset sales but net debt of €24.315bn was not, further adding to creditors’ woes that value has fully been stripped away. Leverage on this basis, as reported, stands at 6.4x.

Rather simplistically, if you apply €2.1bn asset sale proceeds to net debt at par, leverage drops to 5.9x. Illustratively, at a 50% discounted buyback leverage drops further to 5.3x, highlighting management’s desire for some sort of discounted transaction. However, with a mid-to-high single digit drop in EBITDA, leverage can be expected to jump back up.

A 7.5% (our interpretation of ‘mid-to-high’ single digit) decrease in FY 23’s €3.785bn EBITDA will put FY 24’s pro forma EBITDA at around €3.5bn. On the par repay scenario, leverage increases to 6.3x and to 5.7x on the 50% discount scenario, still too high and very far away from management’s new target of under 4x.

Image source: Q4 2023 Results Presentation

Construction revenues in need of repair

In Q4 23, total revenues remained flat year-over-year at €2.9bn. The largest segment, residential services (64% of FY 23 revenues), declined by 2.1% YoY, while construction revenues boosted the second-largest segment, business services (33% of FY 23 revenues), by 2.7% YoY.

It's crucial to highlight that revenues declined by 1.3% on a FY 23 basis, and there's an expectation for further, more significant declines in 2024. Residential services operations are facing challenges in a competitive market, as acknowledged by management, particularly in the short term. Previously, management attempted to boost mobile volumes through promotional efforts. However, the growth observed in the low-end value mobile segment hasn't carried over into 2023.

Furthermore, the tailwind from construction revenues that boosted the business segment is set to decrease in 2024, as management has already observed reductions in the number of homes built year-over-year.

Image source: Q4 2023 Results Presentation

The bleak FY 24 EBITDA guidance is attributed to reduced contributions of the high-margin construction segment, inability to push inflationary costs to customers and FTTH line rental costs which management estimated to be €14m per year.

FY 23 EBITDA dropped by 4.3% versus FY 22 to €3.9bn. On a quarterly basis, EBITDA declined by just 1% YoY to €1.05bn, marking an improvement on the 5.4% decline in Q3 23 to €997m. However, this trend was not indicative of a reversal; instead, it is likely a one-off occurrence. EBITDA would have followed prior quarter trends were it not for the contribution of a decreased construction segment and reduced content costs, amounting to between €25m and €30m.

It's also important to note that the FY 24 EBITDA guidelines include the EBITDA contributions of Altice Media, a division expected to be sold in the summer of 2024. When asked by analysts to quantify the difference in guidance after removing Altice Media contributions, management declined to provide further details.

Image source: Q4 2023 Results Presentation

Capex for FY 23 declined 3.1% to €2.3bn, management expects FY 24 capex to increase in the area of €100m. However it also admitted that these decreases would not offset higher interest costs expected to hit €1.45bn in FY 24 versus €1.3bn in FY 23.

On a slightly positive note, management has been able to push 5G spectrum payments of €118m due in Q4 23 to 2026 after negotiations with the French authorities.

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