Altice - Short Sohn Conference, Tel Aviv October 2015 Disclaimer - - PowerPoint PPT Presentation

Altice - Short

Sohn Conference, Tel Aviv October 2015

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Disclaimer

The following presentation represents ION’s analysis and opinions, and is based on publicly available market information and regulatory filings by Altice. This is not an offer to buy or sell securities of Altice, nor should it be taken as advice on whether to purchase or sell securities of

• Altice. ION may have positions, short or long, in the companies

discussed in this presentation. For further information, we encourage readers to review Altice’s publicly available filings.

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Boom and bust cycles – history repeats itself

History is replete with the remains of once high-flying industries and over- leveraged companies

Source: Bloomberg

200 400 600 800 1000

Potash price per tonne, $

100 200 300 400 500 600

Africa-Israel share price, ₪

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Altice overview

• Altice is a Pay-TV/mobile operator in Europe, Israel, and most recently the

US with net debt/EBITDA of 5.7x

Creation of dual class structure to fund M&A while protecting majority control

Altice “created” €15bn worth of equity value in 21 months

Source: Bloomberg

100 200 300 400 500 % change Altice STOXX Europe 600 Telecommunications Drahi sells €550mn in IPO Drahi sells €290mn

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Telco M&A frenzy

The sector’s current EV/EBITDA multiple is 6.8x, up from 5.6x 5 years ago

Source: Bloomberg; Altice and Vivendi filings *offer rejected

5.9x 7.0x 6.9x 10.1x 14.0x 10.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x Sector 5 yr historical average SFR ('14) Portugal Telecom ('14) Suddenlink ('15) Bouygues ('15)* Cablevision ('15) EV/EBITDA multiple

Altice has overpaid for its acquisitions

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Industry headwinds threaten traditional Pay-TV

• 7.3% of US households have broadband but

no pay-TV subscription, up from 4.2% in 2010

• Rise of alternative OTT players
• Broadband connection has become

commoditized – aka “dumb pipe” Altice valuations have soared as sector headwinds have accelerated

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Implausible EBITDA margins

• Altice claims that it has increased margins across its holdings

We question whether HOT’s “real” EBITDA margin has improved by 900bp

Source: Altice Cablevision presentation

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Israel: HOT’s Hebrew disclosure reveals EBITDA margin 500bp below Altice’s reported number

Only 1/3 of the difference is explained by a management fee paid to Altice

Source: HOT 2Q15 financial statements

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Increasing capitalized expenses to inflate ebitda margins

Israel: We question HOT’s aggressive accounting

Source: HOT financial statements

1% 0% 6% 5% 10% 0% 2% 4% 6% 8% 10% 12% 2010 2011 2012 2013 2014

% of content costs shifted from P&L to Balance Sheet

Altice acquired majority

• wnership

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When adjusted for capitalized content costs, margin improvement is negligible

Israel: Adjusted margins paint a different picture

Source: Altice 2Q15 financial statements; HOT 2Q15 financial statement; ION research based on Hot public filings

48% 43% 41% 36% 38% 40% 42% 44% 46% 48% 50% Altice reported margin for HOT 2Q15 HOT reported margin 2Q15 Adjusted HOT margin 2Q15

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Israel: Cost-cutting went too deep

100 200 300 400 500 600 700 2011 2012 2013 2014 Subscribers, k

Israel Pay-TV subscribers

HOT (-6% CAGR) Yes (+2% CAGR)

Analysts assign rich valuations to HOT (average 8.6x 2016 EBITDA) while incumbent Yes/Bezeq trades on 7.3x and is experiencing stronger commercial success

Source: HOT financial statements; Yes financial statements Source: Bloomberg

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Cablevision: Does this deal mark the top?

• Altice is paying a historically high multiple of 10x EBITDA for Cablevision
• Unsecured bonds raised for the Cablevision deal were sold at over 10%

yield, reflecting doubts around the company’s ability to service its debt

New average cost of debt: 7.5% Leverage level: 7.4x pre synergies

Source: Bloomberg

6% 10% 2% 4% 6% 8% 10% 12% Day before Altice acquisition Current Yield on 2022 Cablevision bond

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Cablevision: Cost-cutting targets are unrealistic

Content costs Content costs Non-content costs Non-content costs

• 1

2 3 4 5 6 2014 2018e $, bn Increasing 7.5% per annum Implied 33% reduction in

• ther operating costs

“Management has articulated longer term cost reduction targets to the equity market which far exceed $450 million in savings promised to bondholders. Moody's views this more aggressive target as a longer term, aspirational goal” – Moody’s, September 24, 2015

Source: Cablevision 2014 10k; ION research

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Cablevision: We’re skeptical of margin targets

Cablevision synergy targets of $900m appear lofty especially considering fiber competition, lack of mobile offering, and rising content costs

32% 35% 48% 25% 30% 35% 40% 45% 50% Cablevision US Cable average Altice target for Cablevision EBITDA %

Cablevision margin unlikely to reach Altice target

Source: Altice Cablevision presentation

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Wall Street overlooks the issues

• “Our 12-month ROIC-based price target of €41/shr incorporates a premium above our €30/shr valuation

to capture Altice’s M&A potential” –Goldman Sachs note on Altice, Sept 8, 2015

• “Given that the NAV is clearly growing, we place a 25% premium to NAV in determining our

€38.00/share equity valuation.” –RBC Capital note on Altice, Sept 18, 2015

• “Adding €3.5bn for a 50% probability of a revived Bouygues deal and a further € 4.7bn from additional

M&A (based on our “PE” model) leading to a post-M&A Dec-16 TP of €28. –JPMorgan note on Altice, Sept 1, 2015

• Citi adds €2.5 of value for unknown future deals to Altice’s price target in a Sum of the Parts

Lucrative Wall Street fees ($200m for Cablevision alone) coincide with many sell-side analysts assigning lofty multiples and adding value for unknown future deals

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10 questions for Altice management

1. How do you explain fully the discrepancy between HOT’s reported 2Q15 43% EBITDA margin and your reported HOT margin of 48%? 2. Why has HOT been aggressively growing capitalized content costs while reducing expensed content costs? 3. Has Numericable shifted content costs from the P&L to the Balance Sheet? 4. When do you expect to reverse subscriber losses in Israel and France? 5. How much are content costs expected to rise at Cablevision over the next 3 years? 6. How can Cablevision without a mobile offering effectively compete against Verizon triple play? 7. Can you explain the difference in Cablevision cost-cutting guidance between equity holders and bond holders? 8. Why do you think that you can generate EBITDA margins in the US that far exceed those of any other US operator, including those with greater scale? 9. Why did you create a dual class structure despite the Expert Corporate Governance Service advising against it? 10. Your aggressive cost-cutting efforts in Israel resulted in a large number of customer losses “due to poor service” and you’ve had to invest in “restoring customer service levels” (Altice 3Q14, 1Q15 earnings releases) . Why do you believe that this creates long-term shareholder value?

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Summary

History is replete with sectors whose valuations reached disproportionate levels and then crashed. Every boom and bust cycle has a poster boy. In this cycle, it’s Altice

• We believe that Altice’s operating track record is far less impressive

than we’re led to believe

• We question management’s ability to retain subscribers and

whether they’ve utilized aggressive accounting to inflate EBITDA margins

• In our view, Altice has overpaid for Pay-TV acquisitions against the

rising tide of OTT alternatives and cord cutting

• On realistic multiples, we believe shares are worth ~50% below the

current price