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1/33 Joh. Berenberg, Gossler & Co. KG Sector Special European Telecoms – Vol. I

European Telecoms Vol. I: Better together! - Initiation on Altice

“The telecoms sector hasn’t had its Lehman moment yet. But with declining revenues, rising debt, dated

business models, I worry about that happening.”

Former Digital Agenda Commissioner Neelie Kroes certainly made a point at the

European Internet Foundation Breakfast Debate two years ago. The telecommunications

sector has been hit hard in recent years, mainly by the impact of EC regulations, fierce

competition and flagging economic growth. However, the sector narrative started to

change in 2014, on the back of the EC’s newfound openness to consolidation, the

brightening economic outlook as well as on the general excitement about data growth

and the related future-proof technologies such as 4G and fibre.

Despite a still challenging competitive environment, we expect the telecoms sector to

have reached its trough and recover from 2015 on. While convergence and in-market

consolidation should have more of a stabilising impact on ARPU, we expect a clearly

positive impact on opex and capex, both benefitting from synergies (labour and

maintenance costs, network and IT infrastructure). Due to superior network assets, we

expect operators with cable based fixed-line networks to keep their competitive and

obtain a substantial financial advantage over traditional telecoms, which need to intensify

the expensive fibre deployment in order to become competitive again.

We therefore like the Altice Group, which through its subsidiaries Altice France

(Numericable-SFR) and Altice International operates a multinational cable and

telecommunications business with leading positions in its respective markets. By

following a very distinct pattern – mainly debt-financed acquisitions of underperforming

telecom assets in order to boost their profitability by generating synergies – Altice has

emerged out of relative obscurity. When comparing its subsidiaries, we prefer Altice

International over Altice France given the proven track record of high EBITDA growth,

lower leverage and less potential to experience another near-term leverage-intense

acquisition. Moreover, Altice International’s bonds ALTICE 6 ½ 01/22 and ALTICE 8

12/19 offer considerable spread tightening potential towards their CDS curve, which is

more in line with the ALTICE 5 ¼ 05/23. A comparison with the closest peers draws a

similar picture, with lower rated UPC bonds trading at tighter spreads within the same

time-to-worst bucket. We therefore initiate with an overweight on the ALTICE 6 ½

01/22 and the ALTICE 8 12/19. Please find further recommendations in the report.

Companies covered in this study:

(Screening coverage)

Company Bond ratings/Outlook

Altice S.A. (Altice Group)

B1/neg. (Moody’s)

B+/neg. (S&P)

Altice Financing (Altice International)

B1/neg. (Moody’s)

Bonds only: BB- (S&P)

Altice Finco S.A. (Altice International)

B3/neg. (Moody’s)

Bonds only: B- (S&P)

Numericable-SFR SAS (Altice France)

Ba3/neg.* (Moody’s)

B+/neg. (S&P)

* ratings under review for possible downgrade

Berenberg’s top picks:

Bond/recom. Price / YTW / Z-spread

ALTICE 8 12/19

Overweight

107.9 / 2.4% / 232bps

Next call: 12/[email protected]

ALTICE 6 ½ 01/22

Overweight

108.4 / 4.1% / 405bps


ATCNA 7 ¼ 05/22

Overweight

104.1 / 6.3% / 604bps


(Pricing: 24/03/2015 BGN Close)

25 March 2015

Alexandre Daniel Analyst

+49 69 91 30 90-593

[email protected]

Patrick Voßkamp Research Support

+49 69 91 30 90-596

[email protected]

Type BERF <Go> at Bloomberg for

further Berenberg FI Research

EUR denominated bonds of the Altice Group

Source: Bloomberg, Berenberg Research (Pricing: 24/03/15 BGN Close)

ALTICE 8 12/15/19

ALTICE 6 1/2 01/15/22

ALTICE 9 06/15/23

ATCNA 7 1/4 05/15/22

NUMFP 5 3/8 05/15/22

ALTICE 5 1/4 05/15/23

NUMFP 5 5/8 05/15/24

ATCNA 6 1/4 02/15/25

0

100

200

300

400

500

600

700

0 1 2 3 4 5 6 7 8 9 10 11

Z-/

CD

S-s

pre

ad

(b

ps)

time to worst

Altice SA CDS

Finco/Financing CDS

Numericable CDS

F I X E D I N C O M E R E S E A R C H | C O R P O R A T E S

mailto:[email protected]

mailto:[email protected]


Table of contents

Sector overview – better together! 3

ARPU – tough times behind, turnaround ahead 5

Subscriptions – stagnant quantity asks for better quality 8

Operational expenditure – on track, but still a long way to go 10

Capital expenditure – Europe’s “new deal” 12

Valuation, structural considerations and company profiles 14

Altice S.A. 19

Altice International (Altice Finco S.A. / Altice Financing S.A.) 22

Altice France (Numericable-SFR SAS) 26

Disclaimer 29

Contacts 32


Sector overview – better together!

The European telecoms sector has been hit hard in recent years by the impact of EC regulations, fierce

competition and flagging economic growth. In 2014, the sector narrative started to change on the back of the

EC’s newfound openness to consolidation, the brightening economic outlook, the general excitement about data

growth and the related future-proof technologies such as 4G and fibre. Despite a still challenging competitive

environment, we expect the telecom sector to have reached its trough and recover from 2015 on. While

convergence and in-market consolidation should have more of a stabilising impact on ARPU, we expect a

clearly positive impact on opex and capex, benefitting from synergies (labour and maintenance costs, network

and IT infrastructure).

Overall trend

The European telecommunication sector used to be a role model in the 1990s …

boasting the largest cell phone manufacturers worldwide (e.g. Nokia, Siemens, Alcatel), setting

the global standard for digital cellular networks (GSM) and establishing operators with

stunning 60% profit margins (e.g. France Telecom, Vodafone). Even during the first half of

the following decade, Europe has been anything but a digital laggard, building 3G networks the

quickest and producing the trendiest mobile phones.

… before the European Commission authorities dampened the “gold rush mood” by

curbing lucrative revenue streams (i.a. roaming and termination charges) and imposing strict

pro-competition regulations. Topped with a flagging economy, the old continent’s telecom

sector started to live through years of revenue declines and softening profitability.

Only in 2014 the narrative started to change … again on the back of the European

Commission (EC) or rather its newfound openness to consolidation in order to spark network

investments and growth, even at the risk of higher prices to consumers. What previously

appeared the biggest obstacle for telecom companies no longer seems as formidable.

Regulators started to loosen their grip end of 2012 by clearing the first 4-to-3 merger in

Austria. Despite immediate price increases, authorities probably came to a positive conclusion

regarding their Austrian field study as the EC approval of two pivotal mergers in 2014

demonstrated: Following its Austrian deal, Hutchison strengthened its EC-M&A track record

by taking over Telefonica’s Irish business. At the same time, Telefonica Deutschland got

approval for the – so far – biggest mobile deal in recent years: the acquisition of Dutch KPN’s

German subsidiary E-Plus.

… delighting telecom executives, their shareholders and modestly brightening rating

agencies’ outlooks. Listed telecoms recently reached three-year valuation highs, Moody’s

forecasts a slowdown of revenue declines while EBITDA margins remain stable and also

Standard & Poor’s expects stabilising margins as revenue declines ease and cost streamlining is

anticipated in 2015.

Berenberg Equity Research (BER) has identified three key drivers to the current

bullish consensus: (i) The EC talk is “friendly”. New EC president Jean-Claude Juncker has

highlighted that in the mission to create a single European market “we will need to have the

courage to break down national silos in telecoms regulation, management of radio waves and

competition law”. (ii) The sector M&A party is in full swing. Following in-market mobile

consolidation in Austria, Germany and Ireland, we have more recent deals in Norway,

Denmark, the UK and the potential for further deals in France, Italy, and Spain. (iii) Finally,

the market is also getting excited by data growth (again!). 4G is being credited for improving

recent fortunes of mobile operators like Tele2 and Vodafone [the latter noting a 2ppt

improvement in European service revenue growth ex-MTR (mobile termination rates) in its

last quarterly update].

Testing the bull thesis: BER thoroughly tested the telecom bull thesis in its sector report

Misunderstood mobile (6 January 2015), providing results being as surprising as they are

comprehensive. We included the BER findings in our industry overview, which analyses the

different factors affecting the telecommunications sector as well as how they deteriorated in

The European telecom sector

used to be ahead of time

EC regulations put telecom

operators under pressure

Light at the end of the tunnel:

the EC has changed its tune.

The newfound openness to

consolidation is seen as path to

salvation

Rating agencies modestly

optimistic, but still cautious;

markets mainly bullish

Besides the EC loosening its

grip Berenberg’s Equity

Research sees also the new 4G

based data excitement as a

driver for the bullish consensus

Some of the bull thesis points

impact the main industry driver

http://www.berenberg.de/cgi-bin/content/content.cgi?rm=show_doc&ial=1&sb_userid=0&sb_eventid=0&doc_id=52069


the past and how they are expected to recover in the future. Besides force majeure such as EC

regulations, all factors impacting operating free cash flow (OpFCF, most important sector

KPI) can be grouped into four categories:

(i) ARPU: Telecoms suffered from regulations, product substitutions and flagging economic growth for almost the entire last decade, resulting in tiered ARPU declines. But the sector narrative has changed: we expect 2015 to become the year ARPU will have reached its trough on the back of a new tune in regulations (the floodgates have opened on in-market consolidation – three player markets become the new industry standard, reducing competition, thus supporting ARPU development), the positive impact of convergence offers (providing value greater than the sum of the parts should prevent bundle discounts), the brightening economic environment (as telecoms became cyclical a brightening macro outlook should support ARPU) as well as technological progress (4G, fibre and DOCIS 3.0 positively impact the pricing environment).

(ii) Subscriptions: Across European countries, the penetration of basic telecommunication

access steadily increased within the last decade. In recent years, it started to flatten out at

an average SIM-card penetration rate of above 120%. This maturity level forces telecoms

to transform their business models – also in line with the technological progress – in

order to sustain or even expand their subscriber base while breaking the back of

customer churn the same time. Telecoms face this challenge with convergence bundles

offering exclusive content and functionality.

(iii) Operating expenditure: Disparagingly referred to as mass employers or retirement

homes for ageing workers, incumbents currently experience their most severe

transformation since privatisation end of the last century. Given the lack of revenue

growth and the need for economies of scale in the industry, cost efficiency is on top of

the agenda for most operators. The ongoing in-market consolidation wave opens the fast

lane to improvements with regard to the main opex drivers: labour and maintenance

costs, internal processes, network and IT infrastructure.

(iv) Capital expenditure: As subscribers’ thirst for data and speedier broadband is seemingly

insatiable, networks have to be upgraded and reconfigured to skyrocketing data volumes,

while meeting the need for traditional texts and calls. The EC got telecoms a “new deal”

by exchanging softer regulations for investment commitments. Incumbents started

catching up on the long-delayed 4G rollout and fixed-line upgrades, pushing capex to

record levels in 2014. In order to meet both Digital Agenda objectives and consumer

expectations, operators continue to pursue numerous capital intense projects in the

upcoming years.

Factors impacting operating free cash flow (OpFCF)

Source: Berenberg Research

• Macro: telecoms became cyclical thus a

brightening economy favourable

• Convergence: New ARPU stabilising trend

• Regulation: the EC positively changed its tune

• Data/speed growth: technic sells!

Average Revenue per User (ARPU)I

Revenues

• Convergence: providing value greater than the

sum of the parts is key to reduce churn

• Content & functionality: providing exclusive

services and content attracts new customers

SubscriptionsII

• Productivity improvements: Labour costs

• Internal transformation programs

• Integration: Sharing & integrating

• Consolidation: Main source for opex savings

Operating Expenditure (Opex)III

• Mobile: 4G rollout in full swing, keeping capex

high; further spectrum sales expected in 2016

• Fixed-line: Cable in the lead, incumbents

investing in interim solutions until fibre rollout is

accomplished

Capital Expenditure (Capex)IV

Expenses

Operating Free Cash Flow


ARPU – tough times behind, turnaround ahead

Telecoms suffered from regulations, product substitutions and flagging economic growth for almost the entire last

decade, resulting in tiered ARPU declines. But the sector narrative has changed: we expect 2015 to become the

year ARPU has reached its trough on the back of

(i) a new tune in regulations: the floodgates have opened on in-market consolidation. Three player markets

become the new industry standard, reducing competition, thus supporting ARPU development.

(ii) convergence offers: providing value greater than the sum of the parts should prevent bundle discounts

(iii) macro improvements: as telecoms became cyclical a brightening macro outlook should support ARPU

(iv) data/speed growth: 4G, fibre and DOCIS 3.0 positively impact the pricing environment

Overall trend

Almost the entire last decade has seen the European telecom industry ride out by far its

toughest times, with revenues that have undergone a fairly precipitous decline and margins

losing more and more ground. The persistent downward pressure mainly arose from:

(i) challenging regulations: By far the greatest obstacle telecoms had to overcome. Almost the entire last two decades telecom regulators on the national and the European level have created rules intended to keep communication prices low by stimulating increased competition or by directly imposing price ceilings. Thus, authorities gradually curbed lucrative revenue streams (i.a. roaming or termination charges) and imposed wholesale access (to wireless and wireline networks) at specified rates, the breeding ground for MVNO’s (mobile virtual network operator).

(ii) flagging economic growth: The telecom sector is billed as being defensive, however, Berenberg Equity Research (BER) questioned this former text book wisdom and established good versus bad mobile markets on the basis of mobile service revenue growth ex-MTRs (mobile termination rate) over the last six years. In testing numerous factors, and running over 30 separate regressions, only one factor truly stood out – GDP growth. In a second step, Equity Research regressed the three largest GDP constituents (government spending, investment and consumption) against mobile service revenue growth and identified consumption growth as the real underlying driver. In particular for the last two years an R² of 67% indicates a meaningful result. The sector has gone from no cyclicality to being cyclical, in particular since the financial crisis.

(iii) substitution: Telecoms by nature are closely related to technologies and their increasingly shortening life-cycles, thus are constantly faced with substitution threats. However, whereas substitution processes used to take place within the industry, telecoms recently have been increasingly challenged by other sectors such as the software industry, providing services “over the top” of the operators’ networks (OTT). Taking Voice as an example, on top of the progressing fixed-mobile substitution. Voice is now translated into Data (Voice over IP), opening the door for OTT providers such as Skype or Viper. All mobile services are transformable into simple data. Thus, given increased bandwidth for fixed and mobile users, they can be offered by OTT providers. Lucrative revenue streams as traditional Voice and Text services are step by step cannibalized by low-margin data and benefitting OTT’s.

The changing face of communication

Source: Berenberg Research

1995 2005 2010 2015 2020

The future is all about data - on the wireline and

wireless. Voice, msgs and content are all measured on

data. Network speed/quality comes

as the last possible differentiation

Same revenue streams as 5 years before, different

significance. 3G made mobile data consumable,

driving strong

growth

Whereas communication used to be almost entirely

voice driven in the early 90s, data started to play an

increasingly important role for

revenues from the mid 90s on

Telecoms are fighting declining revenues in fix and

mobile with content offers and network investments

Mobile services increasingly offset precipitous revenue

declines in fixed line services. Mobile data about to

become the

next big thing♫

Voice-MobileVoice-Fix Data-Fix Voice-MobileVoice-Fix Data-Fix Data-Mobile

SMS

Text Msgs

Voice-MobileVoice-Fix Data-Fix Data-Mobile

SMS

Text Msgs Voice-MobileVoice-Fix Data-Fix Data-Mobile

SMS

Text Msgs Add Ons-Services

Data-Fix Data-Mobile

ARPU knew but one direction

in recent years: downwards

Regulatory hurdles by far

curbed revenue streams the most

Telecoms became cyclical, thus

suffered from flagging economic

growth

OTT services offer free or

inexpensive alternatives to

traditional telecom services such

as voice and text


We saw a first light at the end of tunnel in 2014, with softening declines on the top-line and

margins somewhat stabilising. The industry is currently turning former hurdles into stepping

stones and benefits from a brightening market environment in general. We thus expect 2015 to

become the year ARPU will have seen its trough and going forward noticeably stabilise on the

back of:

(i) favourable regulations: As much as most telecom executives saw regulation as root of all evil in the past, the newfound favourable stance of the EC towards consolidation now appears as a path to salvation for them. Authorities kept discussing the chicken or the egg causality dilemma for years, with a digital single market across the 28 EU member states representing the chicken and a fully consolidated market with only a few pan-European operator giants representing the egg. Applying a more benign regulatory regime seemed to be within a more easy reach compared to a consolidation of the heavily national regulation microcosms, thus the EC obviously opted for the egg as the clearance of several 4-to-3 merger suggests. Remedies imposed by the EC have been proven toothless so far. In Austria and Germany, prices for subscribers have uniformly risen following M&A deals. Going forward, consolidation is likely to remain a near to medium term ARPU support. The M&A train is picking up pace, with recent deals in the UK, France, Denmark and Norway leading the way. The window of opportunity for more deals is wide open, pushed trough the lenient credit environment, structural challenges of mobile operators, the favourable stance of EC regulators towards consolidation, some operators opting to sell non-core assets to regain financial flexibility and the ongoing fixed-mobile integration (in order to leverage fixed-line networks’s ability to carry fast rising data traffic generated by mobile users while offering customers convergence bundles that are highly successful in many European markets).

Four player markets likely to see in-market consolidation Prices for bundles already reached the trough in Europe

Source: Berenberg Research Source: European Commission, Berenberg Research

(ii) convergence offers: Besides fuelling the consolidation pipeline, the convergence trend in theory also offers the opportunity to improve market share, reduce churn rates and at least stabilise revenues. Convergence offers – packages bundling multiple services such as fixed and mobile telephony, broadband and television services – help to steer away customers from other providers, in particular if convergence provides value that is greater than the sum of its parts. Following the idea that discount isn’t the differentiator but rather unique, compelling services that can’t be easily replicated, convergence offers are expected to have a stabilising impact on ARPU. As an example, by applying the approach of “if you can’t beat them, join them”, thus partnering up and striking exclusive deals with OTT providers, telecoms can differentiate their service bundles.

(iii) supportive economic environment: BER questioned the defensive nature of the sector and found that telecoms became cyclical since the financial crisis. The sensitivity to the economy results from the exposure to cyclical factors such as travel (especially business travel is clearly cyclical and roaming for outside and coming into the EU is highly profitable) and B2B (businesses become savvier in optimising spend and less sensitive to who they buy services from). A regression based analysis of the relationship between real GDP growth and mobile service revenue growth ex-MTRs had an R² range between 30-60% as a result, depending on the time horizon chosen. Within the last two years, 1ppt of GDP growth implied 2ppt of service revenue growth. Although developments diverge

Consolidation pending

regulatory approvals

Not covered

3 MNOs

4 MNOs

40

50

60

70

80

90

100

2009 2011 2012 2013 2014

Mo

nth

ly p

rice o

f in

tern

et+

fix

ed

te

lep

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ny+

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(€)

8 - 12 Mbps 12 - 30 Mbps 30 - 100 Mbps

2015 is about to become the

year ARPU has seen its trough

The EC’s newfound openness to

consolidation has opened the

floodgates on in-market M&A

deals, reducing competition and

thus at least stabilising ARPU

Convergence offers providing

value that is greater than the

sum of its parts should

contribute to ARPU

stabilisation

As telecoms became cyclical, a

brightening economic outlook

should further support the

ARPU development


across markets, our economists forecasts notable macro improvements for the Eurozone in general, which should exert upward pressure on the ARPU development in 2015 and 2016.

Economic outlook brightens over almost entire Europe 2-year regression implies mobile has become cyclical

2012 2013 2014 2015e 2016e

Eurozone GDP -0.4 -0.4 0.9 1.3 1.9

Private consumption -1.4 -0.6 0.9 1.4 1.2

UK GDP 0.3 1.7 2.6 3.1 3.0

Private consumption 1.5 1.7 2.0 3.0 3.0

Germany GDP 0.9 0.2 1.6 1.8 2.3

Private consumption 0.7 0.9 1.3 1.9 1.7

France GDP 0.0 0.4 0.4 0.8 1.4

Private consumption -0.3 0.3 0.6 1.0 1.2

Italy GDP -2.6 -1.9 -0.4 0.3 1.1

Private consumption -4.1 -2.7 0.3 0.5 0.7

Source: Berenberg Economists, Berenberg Research Source: Berenberg Equity Research

(iv) data/speed growth: wireless voice and text revenues remain under heavy pressure as subscribers switch to data-and-voice bundles or use cheaper, unmetered, IP related voice and texting alternatives. This trend to data-centric business models and tiered pricing (by data buckets and/or speed) should translate into some further rises in data revenues, given increasing 4G coverage as well as widespread usage of smartphones and content-rich applications. BER found that on average, a 4G user chose larger data plans than a 3G users, and on average consumed 57% of the bundle vs 46% for the 3G user. With 4G penetration still relatively low in Europe, it should be a good near to medium term support for upselling data packages. We are confident that 4G is driving a genuine increase in data usage, however, not translating into respective ARPU improvements. Regressions conducted by BER for the last two years showed a positive, albeit weak, relationship between 4G and service revenue growth ex-MTR – with each incremental 10ppt take up of 4G implying only a 1ppt benefit to revenue growth. The sector promotes higher data bundles at almost no premium as a retention tool to stabilise prices and fight competitors. We thus expect at least a stabilising effect on ARPU, similar to the upward gearing trend on the fixed-line/cable side. The rollout of fibre and DOCSIS3.0 technology enables users to a broadband speed experience for which 60% would pay a premium for (Accenture survey 04/14).

In over 30 regressions BER carried out, by far the most meaningful driver of mobile service

revenue growth was GDP growth. Based on a brightening economic forecast of our

economists, we expect at least stabilising ARPU in 2015. Despite showing a weaker

relationship to revenue growth, we also expect data growth, consolidation and convergence

offers to contribute to this trend in mobile ARPU as well as support fixed-line/cable ARPU.

ARPU shifts in France as an example Convergence about to reach 50% penetration in Europe

Source: ARCEP, Berenberg Research Source: European Commission, Berenberg Research

UK

Germany

Italy

Spain

Netherlands

Sweden

Denmark

Switzerland

France

USA

Canada

Belgium

Norway

Japan

Portugal

AustriaFinland

y = 2.0799x - 0.0236R² = 0.5383

-12%

-8%

-4%

0%

4%

8%

-3% -2% -1% 0% 1% 2% 3%

2 y

r se

rvic

e r

even

ue g

row

th

CA

GR

ex

-MT

R

2 yr GDP growth CAGR

22,8 21,3 20,117,1

14,311,4 9,9

2,83,1

3,2

3,3

3,0

2,82,6

1,8 2,2 2,83,2

3,3

3,83,8

27,3 26,6 26,023,6

20,618,0

16,3

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 LTMSept.2014

Ex

-MT

R A

RP

U (

€)

Voice SMS / MMSData ARPU Europe

16%

19%

25%

31%

7%7%

9%11%

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013

Pen

etr

ati

on

rate

2-play 3/4/5-play

As revenue per data/speed unit

is in a precipitous decline,

data/speed growth is more of a

ARPU stabilisator than a

growth driver

In terms of ARPU, 2015 is

about to become a turnaround

year

http://www.berenberg.de/cgi-bin/content/content.cgi?rm=show_doc&ial=1&sb_userid=0&sb_eventid=0&doc_id=52174


Subscriptions – stagnant quantity asks for better quality

Across European countries, the penetration of basic telecommunication access steadily increased within the last

decade. In recent years, it started to flatten out at an average SIM-card penetration rate of above 120%. This

maturity level forces telecoms to transform their business models – also in line with the technological progress –

in order to sustain or even expand their subscriber base while breaking the back of customer churn the same

time. Telecoms face this challenge with

(i) convergence offers: providing value greater than the sum of the parts steers customers away from other

operators. Quad-play transforms pre-paid subscriptions into post-paid, thus reduces churn rates

(ii) exclusive content & functionality: partnering up with OTTs provides further differentiation

Overall trend

The changing face of communication does not only affect ARPU composition but also

subscription patterns. The proliferation of mobile phones as an example, led to declining fixed-

line voice subscriptions which in effect have been offset by rising mobile voice-and-text plans.

Yet again, customers switch from voice-and-text plans to data-and-voice bundles. In particular

in Europe, where a SIM-card penetration of above 120% indicates a certain market maturity

and subscriber growth rates experience a slowdown, shifting subscribers within the respective

segment (mobile or fixed) in line with the technology cycle and without customer departures

and defections (churn) becomes increasingly important for most operators. A larger subscriber

base is not only important for revenue generation: Scale helps to better invest in new

technology, spreading fixed costs across a broader customer base, allowing for faster

innovation and deployment of new services as well as potential time-to-market advantages. We

analysed how telecoms plan to shift existing customers to state-of-the-art technologies and the

respective contracts while breaking the back of customer churn the same time.

(i) Convergence offers increasingly become the new sector panacea as packaging multiple

services onto a single bundle wisely does not only positively impact ARPU but also steers

away subscribers from other providers. Formerly limited to joint mobile and fixed voice

offerings, convergence used to be somewhat of a damp squib. In line with the

technological progress convergence possibilities significantly improved and became way

more attractive to subscribers. However, packages offering simple discounts as the sole

differentiator are easy to replicate by shaving still more off the costs. If being more than

just built around very simply discounted bundles that prompt customer to buy more and

save, convergence offers can create tighter bonds that reduce churn rates. Operator’s

assets can be combined in ways that offer unique, compelling services consumers

perceive as valuable but that telecoms can provide at limited or even no cost, hence

without eating into existing revenues (e.g. shared allowances for minutes and data, ability

to configure multiple devices with a single online interface). In particular, quad-play

intensifies the churn reducing impact of convergence as reflected in the quarterly figures

of French incumbent Orange shown on the next page.

2005: Service- and infrastructure-bound devices vs 2015: Device-independent services and infrastructure-indep devices

Source: BCG, Berenberg Research

Device Service Infrastructure

Fixed phone PSTN

Mobile phone GSM

Broadband DSL

TV DVB

Bundled mobile and fixed voice service was the key offering,

but had limited consumer acceptance

Device Service Infrastructure

Fixed phone PSTN, DSL

Mobile phone LTE, Wi-Fi

Broadband DSL

TV DVB, DSL

New technological landscape enables cross-device services, tariffs and

infrastructure accompanied by growing customer demand

In a mature market sustaining

or even expanding the subscriber

base is key to success

Implemented wisely, convergence

offers can help telecoms to reduce

churn and attract new customers


The more services and devices in a bundle, the harder it is to switch to another as the

economies of scale make it simply too cumbersome. Orange doubled the share of quad-

play subscriptions out of its total broadband base in only two years. At the same time,

churn for mobile post-paid and for total mobile subscriptions declined by 4ppt,

respectively. The latter also driven by the fact that a bundle addition of mobile potentially

transforms former pre-paid customers into post-paid subscribers. Cable operators draw a

similar picture, pushing via MVNO agreements into mobile to provide quad-play in an

attempt to keep or acquire new subscribers.

Quad-play is enjoying increasing popularity in Spain Quad-play has a churn-reducing impact for Orange

Source: CNMC, Eurostat, Berenberg Research Source: Orange S.A., Berenberg Research

(ii) Content/functionality: Access to exclusive content and functionality is important for

retaining customers. Streaming videos on demand (VoD) on any device at any place is

now commonplace. In particular cable companies have successfully applied their

bandwidth advantage to introduce enhanced digital TV platforms featuring set-top boxes

that offer not only the popular time-shift functionality, but that also have the capacity to

integrate multiple entertainment services, including OTT platforms. By applying the

approach “if you can’t beat them, join them”, i.e. partnering up with the scourge of

telecoms and striking exclusive deals with OTT providers, telecoms can further

differentiate. However, we expect that these initiatives will remain mainly defensive in the

near-term, aimed at reducing the momentum of subscriber losses in the operators’ video

activities.

High upside potential for smartphone penetration (2013) Convergence trend is driving post-paid contracts up

Source: European Commission, Berenberg Research Source: European Commission, Berenberg Research

Convergence is key to retaining subscribers. Operators offering bundles which provide value

that is greater than the sum of the parts already reduced churn and increased their subscriber

base. At this stage, the impact of OTTs on telecom subscribers is limited, however, poses a

threat in particular with regard to video subscriptions in the future.

31% 27%24%

21% 20% 18% 17%

7%5%

5%5% 4% 3% 3%

10%14% 19% 23% 25%

26% 27%

3% 3% 5% 7% 9%49% 49% 51% 52%

55% 56% 56%

0%

9%

18%

27%

36%

45%

54%

63%

0%

10%

20%

30%

40%

50%

60%

70%

Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 ' 14 Q2 '14 Q3 '14

Quad-play Fixed voice, broadband and pay TVFixed voice, broadband and mobile Double-playTotal bundled take-up (rhs)

28% 27% 28% 28%27%

26% 24%

19% 19% 18% 17% 16% 16% 15%

26%28%

31%

34%36% 37%

43%

10%

15%

20%

25%

30%

35%

40%

45%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

Churn - mobile total Churn - mobile post-paid Quad-play

0%

40%

80%

120%

160%

Pen

etr

ati

on

rate

SIM card Mobile data Smartphone

50%48%

46%44%

50%52%

54%56%

40%

45%

50%

55%

60%

2010 2011 2012 2013

Co

ntr

act

typ

e s

hare

Prepaid Postpaid

Partnering up with OTTs to

strike exclusive deals help

telecoms to further differentiate

their offers

Convergence is key to retaining

subscribers, however is

challenged by OTTs in the

future


Operational expenditure – on track, but still a long way to go

Formerly state-owned operators still have a long way to go when it comes to productivity and cost efficiency.

Disparagingly referred to as mass employers or retirement homes for ageing workers, incumbents currently

experience their most severe transformation since privatisation end of the last century. Given the lack of revenue

growth, and the need for economies of scale in the industry, cost efficiency is on top of the agenda for most

operators. The ongoing in-market consolidation wave opens the fast lane to improvements with regard to the main

opex drivers: labour and maintenance costs, internal processes, network and IT infrastructure. While cross

boarder M&A lack material synergies we expect in-market consolidation to lead to scale effects such as for

marketing and customer service, but also to leverage network and product development costs across a wider base.

Overall trend

Following the deregulation and liberalisation of the European telecommunications market

from the late 1980s onwards, incumbents had an overwhelming workload to deal with:

transparency, responsiveness and in particular cost efficiency to just name a few construction

sides. During the transformation process a new sector of corporatized state-owned companies

evolved and today most of these are at least partly or even fully privatised. However,

privatisation is not a guarantor of cost efficiency and higher productivity. Incumbents managed

to abandon traditional centralised bureaucratic organisations for more flexible and business-

like structures, already leading to cost savings. Nevertheless, formerly state-owned telecoms

still face cost and regulatory rigidities forcing them to juggle many roles as the Financial Times

states: public utility, fiscal piggy-bank, national champion, mass employer and a retirement

home for ageing workers. Given the lack of revenue growth, and the need for economies of

scale in the industry, cost efficiency will likely stay high on the agenda for most operators. We

believe that opex-improving opportunities remain substantial and should translate into at least

stabilising profit margins. There is a wide range of cost-reducing measures operators currently

apply. The most common and efficient approaches are:

(i) Productivity improvements: Already often run in the past, operators still have potential

to raise productivity through improved processes, incremental steps and personnel

efficiencies. Labour costs account for approx. 60% of opex (incl. outsourced services)

thus offer the highest savings potential. Even if the naturally increasing number of

retirements is a bit of a relief, a radical workforce reduction which involves a

restructuring of operating models is needed. An increasing number of operators

implement this strategy by moving away from physical to online retail channels,

implementing self-service, using online billing, and outsourcing field operations to

equipment vendors.

(ii) Internal transformation programs: These more radical measures include the redesign

of internal processes, together with IT simplification and automation. As an example, the

rollout of all-IP networks, fibre and 4G currently helps operators to reduce maintenance

needs and costs. Overall, breaking away from legacy systems unveils large streamlining

potential to telecoms.

(iii) Integration: Network infrastructure is a scale business, thus sharing and integrating to

scale up is a natural evolution for the sector to reduce its overall costs and to improve

efficiency. A similar picture comes for product developments, another area for

economies of scale, particularly for more advanced services. Amounts spent are

increasingly leveraged across markets and operators.

(iv) Consolidation: During the past few quarters, there have been unprecedented activities

of in-market consolidations in the telecoms and cable sector across Europe. Besides the

low interest rate environment and the appetite of pure-mobile players to secure fixed-

broadband assets in order to bundle convergent offers, the simple fact that consolidation

within a market is the main source for substantial opex reductions keeps the M&A

traction gaining momentum. AT Kearney estimates that a reduction of one player in a

market produces yearly opex savings of up to 8% of total operating costs. In-market is

not only the ultimate step to achieve scale effects such as for marketing and customer

Given the lack of revenue

growth, and the need for

economies of scale in the

industry, cost efficiency stays

high on the agenda for most

operators

Labour costs account for

approx. 60% of total opex,

thus offer the highest saving

potential

New technologies reduce

duplications as well as

maintenance needs and costs

Scaling up by sharing network

and development costs reduces

overall costs

Consolidation is the main

source for substantial opex

reductions


service, but also to leverage network and product development costs across a wider base.

The M&A train is set to accelerate, however, on in-market rather than cross-boarder

tracks as shown on the roadmap below.

“Market-share” M&A offers substantial savings potential In-market consolidation in Italy and France expected

Source: MergerMarket, Berenberg Research Source: MergerMarket, Berenberg Research

Europe’s single-market dream remains more a digital vision as the lack of material

synergies will further hamper cross-border consolidation. Scale benefits are limited when

operating across countries, due to language barriers and a highly fragmented regulatory

environment. Some opex (and capex) savings can be achieved in terms of procurement,

but these will not be much, particularly if consolidation involves some of the largest

players, already boasting some of the best terms with suppliers. As shown below,

geographically diversified operators do not necessarily have stronger margins than

without geographical diversification in this business.

Geographical diversification no guarantor for higher profitability Telecom Austria opex post in-market consolidation

Source: Company data, Berenberg Research Source: Company data, Berenberg Research

Ann.

date

Status Target Acquirer Deal value

(in EURm)

Rationale

Feb ‘15 16,725 Convergence

Jan ’15 14,300 Market share

Sep ’14 3,675 Convergence

Jun ’14 17,000 Market share

Jun ’14 7,200 Market share

Feb ’14 8,550 Market share

Jul ’13 8,634 Convergence

Feb ‘13 18,485Strategic

investment

Completed In progress

Probability Acquirer Potential M&A target(s) Rationale

High Italy (Wind) Market share

High

Italy (Fastweb)

UK (TalkTalk)

Germany (Tele Columbus)

Liberty Global

Market share /

Convergence

High France (Bouygues) Market share

Medium France (Iliad, Free) Market share

Medium Belgium (Mobistar, Base) Market entry

Low Netherlands (Tele2) Market entry

Low Belgium( Mobistar) Market share

Low Orange Market share

Vodafone

Telecom Italia

Belgacom

Portugal TelecomTDC

Telekom AustriaOrange

ElisaTelenor

Tele2

KPN

HutchisonTeliaSonera

Deutsche TelekomVimpelcom

TelefonicaIliad

SFR

20%

25%

30%

35%

40%

45%

50%

0% 10% 20% 30% 40% 50%

EB

ITD

A m

arg

inL

TM

Q3 2

014

(%

)

Weighted market share Q3 2014 (%)

# EU countries player is active in

1-3 4-6 >6

0%

20%

40%

60%

80%

100%

0

750

1,500

2,250

3,000

3,750

2011 2012 2013 2014

Revenue (€m) OPEX (€m)EBITDA margin (rhs) Opex/revenue (rhs)

Cross-border consolidations lack

material synergies. Opex

reducing in-market M&A is

in full swing


Capital expenditure – Europe’s “new deal”

As subscribers’ thirst for data and speedier broadband is seemingly insatiable, networks have to be upgraded

and reconfigured to skyrocketing data volumes, while meeting the need for traditional texts and calls. The EC

got telecoms a “new deal” by exchanging softer regulations for investment commitments. Incumbents started

catching up on the long-delayed 4G rollout and fixed-line upgrades, pushing capex to record levels in 2014. In

order to meet both Digital Agenda objectives and consumer expectations, operators continue to pursue numerous

capital intense projects in the upcoming years:

(i) Mobile: The 4G rollout is in full swing, keeping capex high; further spectrum sales expected in 2016

(ii) Fixed-line: Cable in the lead; incumbents investing in interim solutions until fibre rollout accomplished

Overall trend

With subscribers’ thirst for data seemingly insatiable, these are heady times for network

operators. Spurred by increasing smartphone and tablet penetration, next-generation networks,

and bandwidth intensive applications like video streaming and internet browsing, mobile data

alone already grew by 81% in 2013 according to Cisco’s Visual Networking Index. And no

slowdown is in sight: by 2018, traffic is expected to be almost eleven times greater than in

2013. As of today, already 91% of the world’s total traffic on mobile networks is data, and the

number is expected to increase further. Networks therefore have to be upgraded and

reconfigured to data, while still meeting the need for traditional texts and calls. However, while

most developed countries increased their infrastructure investments, the softening profitability

European telecoms saw in recent years led to a poor investment climate. Paired with an

outdated and intrusive regulation that distorts market-based competition and discourages

capital investments, telecoms stepped back from larger capex-efforts for urgently needed

technologies …

… until 2014! Last year marked a turning point for European operators: M&A, softer

regulation and the convergence trend brightened their outlook and encouraged in particular

incumbents to start a new investment cycle. The EC got telecoms a “new deal”, by loosening

its grip in exchange of an investment commitment in faster broadband networks. With double-

digit growth in absolute terms, 2014 became a record year for capex, also reflecting the

ongoing technological development (migration to 4G in mobile and to fibre in fixed-line) and

intense competitive pressures (incumbents responding to cable operators). In order to meet

both Digital Agenda objectives and consumer expectations, operators continue to pursue

numerous capital intense projects in the upcoming years:

(i) Mobile: Operators currently are in the middle of the long-delayed catch-up in wireless

investments. In particular mobile leaders are heavily investing in the rollout of 4G

networks, which is expected to be largely completed by end of 2016. As of today,

network quality in Europe widely varies, with best networks being twice as fast as the

worst ones, however, so far without resulting in remarkably better pricing power.

Networks have to be upgraded

and reconfigured to subscribers’

insatiable data thirst, while still

meeting the need for traditional

texts and calls

2014 became a record year for capex in Europe Spectrum due decline in mobile, fibre driven increase in fix*

Source: Company data, Berenberg Research Source: ETNO, Berenberg Research; *tangible capex of ETNO members

The EC got telecoms a “new

deal” by exchanging looser

regulations for investment

commitments

The long-delayed rollout of 4G

drove capex up in 2013/14

and is expected to continue so in

2015/16

5,000

6,500

8,000

9,500

11,000

12,500

14,000

11%

12%

13%

14%

15%

16%

17%

2010 2011 2012 2013 2014

Cap

ex

-sp

ectr

um

sale

s (€

m)

Cap

ex

-sp

ec.

sale

s in

% o

f sa

les

Telefonica Deutsche Telekom Vodafone

16.1 16.6 16.6 16.317.9

10.9 11.5 11.3 11.4 10.827.0

28.1 27.9 27.7 28.7

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014e

(€b

n)

Mobile Fixed


Incumbents therefore increase pressure on financially less powerful challengers by

continuing capital spending apace. We therefore expect 4G-capex for large telecoms to

remain at a level similar to the previous year, even though 2015 should not include major

costs from 4G spectrum acquisitions. For 2016, we see continued high capex, especially if

governments start selling spectrum in the 700 Mhz band to support future demand on

4G networks. For the years thereafter, Vodafone just fuelled the vision pipeline at the

CeBIT computer fair in Germany by presenting an experimental version of 5G, a mobile

network standard a thousand times faster than today’s 4G standard.

(ii) Fixed-line: Cable operators will keep their lead in superfast broadband in the mid-term

thanks to their superior network assets. Most cable companies have completed (or are

about to complete) the upgrade to DOCSIS3.0, a technology theoretically supporting

broadband speeds up to 1,000Mbps within the existing coaxial cable networks. The

bandwidth capacity cements their competitive advantage over traditional telecom

operators, currently upgrading to VDSL2, a vectoring technology supporting approx.

100Mbps within the existing copper line networks. Future-proof next-generation network

“fibre to the home” (FTTH), with the potential for virtually limitless capacity with

relatively inexpensive upgrades, comes at significantly higher deployment costs compared

to upgrades of existing networks. Incumbents therefore cling their hopes on G.fast as

interim solution until fibre will have a similar coverage as copper has now. Based on

vectoring as well, G.fast enables data rates of up to several 100 Mbps via existing copper

lines. However, even if already in the lead, cable operators will react by extending the gap

via DOCSIS3.1, a technology boasting bandwidths of up to 10Gbps. Even if consumers

are far from needing such speed right now, in order to compete in the future, incumbents

will step up their superfast broadband rollout efforts by investing in G.fast and the only

cable competitive technology so far: FTTH.

Bandwidths remain largely below EU’s 2020 target EU27 countries upgrade to future-proofed cable & fibre

Source: European Commission, Berenberg Research Source: European Commission, Berenberg Research

0%

10%

20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014

> 10 Mbps > 30 Mbps > 100 Mbps

EC target for 100Mbps penetration by 2020

0%

20%

40%

60%

80%

100%

2006 2008 2010 2012 Jan-14 Jul-14

DSL (VDSL included) Cable (DOCSIS 3.0 included)

FTTH/B Other

Catch-up in 4G rollout apace EU5 Ø mobile download speed (Mbps) outpaced US

Source: European Commission, Berenberg Research Source: Netindex, Berenberg Research

Cable operators will keep the

lead over traditional telecoms in

terms of bandwidth speeds,

meaning even more capex for

incumbents in order to deploy

competitive fibre

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013

(Advanced) 3G 4G - LTE

0.00

3.50

7.00

10.50

14.00

17.50

US World EU5 Average


Valuation, structural considerations and company profiles

Long story short: today’s ingredients for a prospering telecommunications business are

convergence offers with exclusive content and functionalities, spiced with consolidation and

management driven opex and capex savings. Altice International (ALTICE) already proved

excellent execution of this recipe by boosting margins in Israel, French Overseas and especially

in the Dominican Republic. The latest acquisition marks the same distinctive pattern of the

Altice Group: targets such as Portugal Telecom have EBITDA margins that are well below

group level, offering scope for earnings and free cash flow improvements. Following the

completion of the Numericable-SFR merger (NUMFP), Altice France is now due first synergy

improvements in 2015. When comparing Altice S.A.’s key subsidiaries, we prefer Altice

International over Altice France given

(i) a proven track record of high EBITDA growth

(ii) lower leverage (3.6x vs 3.7x including the 20% Vivendi stake purchse)

(iii) less potential to experience another near-term re-leveraging acquisition (Altice France

likely to acquire Bouygues Telecom; at 8.0x EBITDA purchase price, leverage would

increase to approx. 4.4x)

(iv) more favourable conditions in the markets Altice International operates in.

2014 full year group results showed a clear outperformance of Altice International compared

to Altice France. However, similar to Numericable-SFR, the International entity has a

considerable execution and integration risk (Portugal Telecom) over the coming years.

Altice S.A. – Altice International – Numericable-SFR capital structure as of Y/E 2014, PF for Portugal Telecoms

Source: Company data, Bloomberg, Berenberg Research

Altice S.A.

Numericable-SFR

Ypso France SASSFR

IsraelAltice Finco

Altice Financing

Dominican

RepublicFOT

PT

Portugal

Altice

Portugal

Guarantor for Altice S.A. SNs

Guarantor for Altice Finco

SNs & Altice Financing SSNs

Indirect Guarantors for Altice Finco SNs

& Altice Financing SSNs

Altice France

Altice West

Europe

Altice

Caribbean

Altice International

Consolidated net debt (xEBITDA): 23,973€m (4.4x), Cash: 1,563€m, RCF:

306€m, Term loans&Other: 5,650€m, Bonds: 19,579€m, thereof this entity:

2,075€m 7.250% 2022 Sr. Unsec. Nts., Recom: OW

750€m 6.250% 2025 Sr. Unsec. Nts., Recom: MW

Consolidated net debt (xEBITDA): 7,320€m (3.6x), Cash: 188€m, RCF: 306€m, Term loans&Other:

1,726€m, Bonds: 5,476€m

Total net debt (xEBITDA): 11,252€m (3.3x),

Cash: 546€m, RCF: 50€m, Term loans&Other:

3,875€m, Bonds: 7,873€m, thereof this entity:

1,000€m 5.375% 2022 Sr. Sec. Nts., Recom: MW

1,250€m 5.625% 2024 Sr. Sec. Nts., Recom: MW

Total debt (Net debt/EBITDA): 1,271€m

(3.7x), Bonds: 1,271€m, thereof this entity:

250€m 9.000% 2022 Sr. Unsec. Nts., Recom: MW

Total debt (Net debt/EBITDA): 6,237€m

(3.1x), RCF: 126€m, Term loans&Other:

2,157€m, Bonds: 3,954€m, thereof this entity:

210€m 8.000% 2019 Sr. Sec. Nts., Recom: OW

300€m 6.500% 2022 Sr. Sec. Nts., Recom: OW

500€m 5.250% 2023 Sr. Sec. Nts., Recom: MW

Sr. Sec. Nts. restricted group

Sr. Nts. restricted group

Sr. Sec. Nts. restricted group

100% 100%

80%

100% 100%

100% 100% 100% 100%

100% 100% 100%

100%

100%

When comparing operating

entities, Altice International

already proved impressive

margin raising abilities post

acquisitions


The negative outlook on all Altice ratings reflects the aggressive M&A path and the related

significant execution and integration risks. Over the medium term, we expect the company’s

credit profile to become even more leveraged within the limits of its favourable covenants

(relevant debt definition for the incurrence tests under the company’s long-term debt

instruments excludes debt-like items such as pensions or put options and includes expected

synergies and cost savings up-front to EBITDA), however outside of their current rating

category.

EUR denominated bonds of the Altice Group ATCNA* compared to similarly rated peers

Source: Bloomberg, Berenberg Research

Source: Bloomberg, Berenberg Research; *incl. similar rated ALTICE 9 06/23

Since rating agencies have set Altice already on watch for downgrade, we believe that most of

the negative event risk has already been priced in. However, we see considerable justified

spread differences within the Altice universe:

ALTICE: On top of Altice International’s strong operating performance, its lower leverage

and event risk, two of the EUR Altice Financing bonds looks cheaply priced to us. The

ALTICE 6 ½ 01/22 and the ALTICE 8 12/19 offer considerable spread tightening potential

towards their CDS spread level, which is more in line with the ALTICE 5 ¼ 05/23. The

comparison with the closest peers draws a similar picture: Lower rated UPC bonds trade at

tighter spreads within the same time-to-worst bucket. We therefore initiate with an overweight

recommendation on the ALTICE 6 ½ 01/22 and the ALTICE 8 12/19 bond, currently

trading at a respective yield-to-worst of 4.1% and 2.4%. We further add coverage of the

ALTICE 5 ¼ 05/23 and ALTICE 9 06/23 with a marketweight recommendation, the latter

due to its structural subordination.

ALTICE* compared to similarly rated peers NUMFP compared to similarly rated peers

Source: Bloomberg, Berenberg Research; *excl. lower rated ALTICE 9 06/23


ALTICE 8 12/15/19

ALTICE 6 1/2 01/15/22 ALTICE 9

06/15/23

ATCNA 7 1/4 05/15/22

NUMFP 5 3/8 05/15/22

ALTICE 5 1/4 05/15/23

NUMFP 5 5/8 05/15/24

ATCNA 6 1/4 02/15/25

0

100

200

300

400

500

600

700

0 1 2 3 4 5 6 7 8 9 10 11

Z-/

CD

S-s

pre

ad

(b

ps)

time to worst

Altice SA CDS

Finco/Financing CDS

Numericable CDS

MATTER 8 1/4 02/15/20

EIRCMF 9 1/4 05/15/20

UPCV 6 3/8 09/15/22

UPCB 6 3/8 09/15/22

ALTICE 9 06/15/23

ATCNA 7 1/4 05/15/22

ATCNA 6 1/4 02/15/25

VMED 4 1/2 01/15/25

ZIGGO 4 5/8 01/15/25

UNITY 3 3/4 01/15/27

0

100

200

300

400

500

600

700

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Z-s

pre

ad

in

bp

s

time to worst

TNETBB 6 3/8 11/15/20

ALTICE 6 1/2 01/15/22

TNETBB 6 1/4 08/15/22

TNETBB 6 3/4 08/15/24

ALTICE 8 12/15/19

UPCB 6 3/4 03/15/23

ALTICE 5 1/4 02/15/23

UPCB 6 3/8 09/15/22

ZIGGO 4 5/8 01/15/25

VMED 4 1/2 01/15/25

TNETBB 6 5/8 02/15/21

150

200

250

300

350

400

450

0 1 2 3 4 5 6 7 8 9

Z-s

pre

ad

in

bp

s

time to worst

UNITY 5 1/2 09/15/22

UNITY 5 1/8 01/21/23

UNITY 5 5/8 04/15/23

UNITY 4 01/15/25

UNITY 3 1/2 01/15/27

NUMPF 5 3/8 05/15/22

NUMFP 5 5/8 05/15/24

WINDIM 4 07/15/20

200

250

300

350

400

450

500

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Z-s

pre

ad

in

bp

s

time to worst

Overweight recommendation on

ALTICE 6 ½ 01/22 and

ALTICE 8 12/19.

Marketweight on ALTICE

5 ¼ 05/23 and ALTICE 9

06/23


ATCNA: Within the Altice S.A. structure we initiate with an overweight recommendation on

the ATCNA 7 ¼ 05/22 and a marketweight recommendation on the ATCNA 6 ¼ 02/25.

Despite a longer maturity thus increased uncertainty, ATCNA 6 ¼ 02/25 trades at a similar

yield and a slightly tighter spread compared to ATCNA 7 ¼ 05/22. Compared to similarly

rated peers such as UPC or Virgin, particularly ATCNA 7 ¼ 05/22 spreads look exaggerated

and far above the respective CDS curve. We believe that at current leverage levels, the

potential acquisition of Bouygues would have to be funded with a significant equity

component, which could even have a positive impact on Altice’s credit profile. Hence, we

expect a potential Bouygues merger to have not the same negative impact on the ATCNA

bonds, that the Portugal Telecom acquisition had, which was an all-debt and cash financed

transaction.

NUMFP: We have considerable re-leveraging concerns for Numericable-SFR given the recent

Vivendi stake increase and the potential for consolidation in the French telecommunications

market. Even if the larger part is expected to be equity funded, we expect the remaining debt

component to a large extent to be carried by NUMFP as leverage headroom on the holding

level remains limited at approx. 5.0x leverage post the recent Vivendi stake purchase. NUMFP

already has to carry half of this 20% stake acquisition, amounting to €1.95bn which is expected

to be acquired through a share buyback programme, funded by drawings on RCFs and cash on

the balance sheet. We expected at least Moody’s to one-notch downgrade the company which

explains the current spread levels at B1 comparable peers. Moreover, both bonds the NUMFP

5 ⅜ 05/22 and the NUMFP 5 ⅝ 05/24, trade close to their CDS curve. We therefore initiate

with a marketweight recommendation.

Recent events impacting spreads within the EUR bond universe of the Altice Group


250.0

350.0

450.0

550.0

650.0

750.0

03/14 04/14 05/14 06/14 07/14 08/14 09/14 10/14 11/14 12/14 01/15 02/15 03/15

OA

S s

pre

ad

ATCNA 7 1/4 05/15/22 ATCNA 6 1/4 02/15/25 ALTICE 9 06/15/23 ALTICE 8 12/15/19

ALTICE 6 1/2 01/15/22 ALTICE 5 1/4 02/15/23 NUMFP 5 3/8 05/15/22 NUMFP 5 5/8 05/15/24

ECB announcedexpanded QE

Oi approves sale of PT Portugal

Rumours on acquisition of PT Portugal surface

Overweight recommendation on

ATCNA 7 ¼ 05/22.

Marketweight on ATCNA 6

¼ 02/25

Marketweight recommendation

on both Numericable-SFR

bonds NUMFP 5 ⅜ 05/22 and

NUMFP 5 ⅝ 05/24


Capitalization (2014, pro forma PT)

Debt Instrument Cry Interest Maturity First call Outst. (€m)

xEBITDA Moody’s/ S&P* Cash Price

YTW Z-spread to worst

Recom

6.5%

Altice Financing SA € 01/22 12/[email protected] 300 - B1 (43%)/ BB- (70-90%) 108.4 4.14 405.2 OW

Altice Financing SA $ 6.5% 01/22 12/[email protected] 743 - B1 (43%)/ BB- (70-90%) 102.8 5.80 436.7 -

Altice Financing SA € 8% 12/19 12/15@104 210 - B1 (43%)/ BB- (70-90%) 107.9 2.40 231.7 OW

Altice Financing SA $ 7.875% 12/19 12/[email protected] 380 - B1 (43%)/ BB- (70-90%) 106.1 4.54 416.3 -

Altice Financing SA € 5.25% 02/23 02/[email protected] 500 - B1 (43%)/ BB- (70-90%) 105.3 4.23 390.7 MW

Altice Financing SA $ 6.625% 02/23 02/[email protected] 1,821 - B1 (43%)/ BB- (70-90%) 102.3 6.15 454.5 -

Total Senior Secured - - - - 3,954 - - - - - -

Unsec. Notes & Loans - - - - 2,283 - - - - - -

Total Secured - - - - 6,237 3.1x - - - - -

Altice Finco SA $ 9.875% 12/20 12/[email protected] 351 - B3 (9%)/ B- (0-10%) 110.1 6.34 563.0 -

Altice Finco SA € 9% 06/23 06/[email protected] 250 - B3 (9%)/ B- (0-10%) 116.9 4.60 445.0 MW



Total Senior Unsec. - - - - 1,271 3.7x - - - - -

Total Senior - - - - 7,508 - - - - - -

Cash - - - - 188 - - - - - -

Total Net Debt - - - - 7,320 3.6x - - - - -

Numericable

Numericable Group SA € 5.625% 05/24 05/[email protected] 1250 - Ba3 (50%)/ B+ (50-70%) 105.1 4.77 437.7 MW

Numericable Group SA € 5.375% 05/22 05/[email protected] 1,000 - Ba3 (50%)/ B+ (50-70%) 104.1 4.47 418.7 MW

Numericable Group SA $ 6% 05/22 05/[email protected] 2,893 - Ba3 (50%)/ B+ (50-70%) 100.2 5.94 433.7 -

Numericable Group SA $ 4.875% 05/19 05/[email protected] 1,736 - Ba3 (50%)/ B+ (50-70%) 99.3 5.07 368.6 -

Numericable Group SA $ 6.25% 05/24 05/[email protected] 994 - Ba3 (50%)/ B+ (50-70%) 101.4 6.01 425.5 -


Total Loans - - - - 3,780 - - - - - -

Total Secured - - - - 11,653 - - - - - -

Other debt - - - - 145 - - - - - -

Total Senior Unsec. - - - - 145 - - - - - -

Total Senior - - - - 11,798 - - - - - -

Cash - - - - 546 - - - - - -

Total Net Debt - - - - 11,252 3.3x - - - - -

Altice SA

Altice SA € 7.25% 05/22 05/[email protected] 2,075 - B3 (8%)/ B (10-30%) 104.1 6.31 603.7 MW

Altice SA $ 7.75% 05/22 05/[email protected] 2,097 - B3 (8%)/ B (10-30%) 100.8 7.55 608.0 -

Altice SA € 6.25% 02/25 02/[email protected] 750 - B3 (8%)/ B (10-30%) 99.6 6.30 578.3 UW

Altice SA $ 7.625% 02/25 02/[email protected] 1,308 - B3 (8%)/ B (10-30%) 100.9 7.49 560.2 -


Cash - - - - 829 - - - - - -

Total Net Debt - - - - 5,401 - - - - - -

Consolidated

LTM Q3 2014 PF EBITDA consol. incl. synergies

- - - - 5,463 - - - - - -

Total Altice SA consolidated net debt

- - - - 25,536 - - - - - -

Cash - - - - 1,563 - - - - - -

Total Net Debt 23,973 4.4x - - - - -

Source: Company information, Berenberg Fixed Income Research *(Recovery Rate )


Special considerations/covenants on Altice’s EUR denominated bonds*

Collateral Covenants Indebtedness

Altice SA 6 ¼ 02/25 The Collateral secures both Notes on a pari

passu basis. In value terms, Collateral is only

worth residual equity value in pledged shares,

after repayment of all other liabilities (including

financial debt) of companies whose shares are

pledged and of all their subsidiaries and the

value of the AI Mandatory Convertible Notes

Various of the covenants assess/permit actions

at Issuer/Guarantor level, Numericable level

and/or AlticeInternational level separately

(most notably Indebtedness). There is

protection in some of the covenants regulating

matters as between Numericable group and

Altice International group - but there is not

absolute ring-fencing between them.

In Indebtedness, contribution debt may be

secured pari with Notes, subject to 4x CNLR

test only. Unlimited dividends allowed if CNLR

4x or less

Consolidated Net Leverage Ratio (tests used in CoC,

Indebtedness, Liens, Restricted Payments, Merger):

i) NLR is net of uncapped cash/equivalents, meaning it can be

manipulated by injection of cash

ii) Relevant Credit Facilities baskets excluded from debt

numerators (whether initial RCF or any subsequent RCF or

term bank/bond debt)

iii) Pro Forma EBITDA denominator is last two quarters

multiplied by two, not on last four quarter basis.It includes add-

back for management fees etc. to Permitted Holders and

addback for any uncapped, anticipated cost savings/synergies

(including from general business optimisation programmes)

Altice SA 7 ¼ 05/22

Altice Financing 5 ¼ 02/23

Collateral enforcement/distressed disposals proceeds applied first to Super Priority debt

Unrestricted Subs (not regulated by any of the covenants) will be Altice Finco SA Green Datacenter and Auberimmo SAS. Investment in Altice Finco SA (can include loan or guarantee of its liabilities) can be made under JV/Unrestricted Subs basket up to greater of 3% Total Assets and €325mm. Such upstreaming could also occur under general €350mm/3% Total Assets basket, in addition Competition-law driven disposals will not trigger put (even if Rating Decline) and proceeds of such disposals may repay other (including pari debt) without pro rata offer to Noteholders.

Leverage Ratio and Senior Secured Leverage Ratio used in various contexts are net of uncapped cash/eq and numerator subject to some exclusions (including €1.5B/80% EBITDA Credit Facilities baskets in some places) and denominator subject to aggressive add-backs. Note ability for issuer/Guarantors to guarantee on subordinated basis Holdco [ie Altice Finco SA] debt subject to 4x CNLR (3.7x in OM - so immediate headroom). Guarantees of Holdco debt may also be given under contribution debt basket and €500mm/4% Total Assets general basket without CNLR test and without requirement that such guarantees be subordinated. As drafted such guaranteed Holdco debt may be but does not have to be downstreamed to Restricted Group (thus these could enable dividend recap/incurrence of debt by Altice Finco for other purposes than Restricted Group's business, but guaranteed by Restricted Group)

Altice Financing 8 12/19

The most important piece of Collateral appears to be the HOT Refinancing Note. This is how noteholders have a direct interest in the assets at HOT. However, some of the assets require regulatory approval before they are pledged and if regulatory approval is not obtained within 180 days, the interest rate will increase by 100 bps.

The RP covenant is flawed since it permits unlimited distributions if the 2.75x Leverage Ratio is met

Credit Facility debt will rank ahead of the notes. Since the Issuer is a financing vehicle, all debt it issues will be "secured" by a lien on the proceeds loan. Therefore, the ratio debt exception is tied to a 3x Secured Leverage Ratio. Covenant Parties and Restricted Subs can only incur debt under one of the Permitted Debt exceptions

Altice Financing 6 ½ 01/22

Super Priority Debt of €100mm/4% Total Assets plus certain hedging, which will be repaid from enforcement proceeds ahead of Notes. Super Priority hedging is extensive as it includes not just interest rate/fx hedging of financial debt but fx hedging of opex and capex. In addition to that Guarantees/ Collateral secure substantial amount of other existing debt as well as permitted future debt.

Altice Finco SA (the issuer of the $400mm senior notes to be issued contemporaneously) is

not a Restricted Subsidiary for the purpose of these (Senior Secured) Notes and is thus not bound by the covenants

Ratio Debt incurrence regulated by 3x Senior Secured Leverage Ratio - while leverage ratios typically used for telecoms issuers, note here it is senior secured leverage, not straight total leverage. In ratios, EBITDA is last 2 quarters x 2

Altice Finco 9 06/23

Guarantees will be given on a senior subordinated basis, being subordinated to a substantial amount of such Guarantors' senior debt. The negative pledge will permit a significant amount of debt to be secured either ahead of the Notes (via a first lien on the Collateral) or via pari passu lien on the Collateral. In each case, there could be a significant amount of collateral dilution

The RP covenant is permissive since it permits unlimited distributions if the 2.75x Leverage Ratio is met

Ratio debt incurrence is tied to a 3x Secured Leverage Ratio for the Senior Secured Notes Issuer and a 4x Leverage Ratio for the Issuer. Altice International and Restricted Subs can ONLY incur debt under one of the Permitted Debt exceptions

Numericable 5 3/8 05/22

Holders of the Notes will share in recovery from enforcement of the collateral on a pari passu basis with lenders of the Senior Credit Facility, Revolving Credit Facilities, counterparties to certain hedging obligations and the other series of Notes issued contemporaneously with these Notes.

Change of Control has portability as, to be triggered, put requires Rating Decline for so long as Vivendi owns at least 20% of Issuer. CNLR and CNSSLR tests (used in CoC, Liens, Indebtedness, Restricted Payments, Merger) are all on net basis, meaning they could be managed downwards by cash injection. In both, there are exclusions from debt numerator (large Credit Facilities basket, except for RP test) and CNSSLR numerator very narrowly drawn, making ratio easier to meet.

Summary of Intercreditor Agreement contemplates Super Priority Debt being incurred in future (comprising working capital facilities and hedging) repayable ahead of Notes from Collateral enforcement/disposalproceeds

Numericable 5 5/8 05/24

Sources: Xtract Research Reports, Berenberg Research. *Certain exemptions and further explanations may apply


ALTICE S.A. (Group)

Bloomberg Ticker: ATCNA<Corp>

Recommendations:

Overweight/Marketweight

Bond (Pricing: 24/03/15 BGN Close) Price Z-spread YTW Callable Volume Recommendation

ATCNA 7 ¼ 05/22 104.1 604bps 6.3% 05/17 @ 105.4 €2,075m Overweight

ATCNA 6 ¼ 02/25 99.6 578bps 6.3% 02/20 @ 103.1 €750m Marketweight

Sources: Bloomberg, Company data, Berenberg Research; *pro forma consolidated (incl. SFR, excl. PT Portugal)

Investment thesis & recommendation

Altice S.A. is a Luxembourg-based holding company, which through its subsidiaries Altice France (Numericable-SFR) and

Altice International operates a multinational cable and telecommunications business. The operating entities boasts leading

market positions for pay-TV, broadband internet, fixed-line and mobile telephony services in their respective countries.

Numericable-SFR’s activities are restricted to France, while Altice International currently has a presence in Israel, Dominican

Republic, French Overseas and Western Europe. By following a very distinct pattern - mainly debt-financed acquisition of

underperforming telecom assets in order to boost their profitability by generating synergies - Altice has emerged out of relative

obscurity. The entire group is highly leveraged, with Altice S.A. reporting 4.4x leverage on a consolidated base. Nevertheless,

Altice S.A. spreads are well above those of lower rated peers, their CDS curve and adequate risk premium levels, especially the

ATCNA 7 ¼ 05/22, which we therefore recommend to overweight.

Altice Group overview by product, region and P&L split (12/2014)

Company data

Selected financials* 2013 2014

Headquarter: Luxembourg (Luxembourg) Revenue (€m): 14,109 13,464

Market cap/employees: €25.5bn/c23,000 EBITDA (€m): 4,279 4,009

Major shareholders: P.Drahi through Next L.P. (61%) Operating FCF (€m): 1,945 1,804

Ratings/Outlook KPIs* 2013 2014

Moody’s: B1/negative Weig. Ø cable ARPU: €41.1 €41.0

Standard & Poor’s: B+/negative Weig. Ø mobile ARPU: €22.8 €21.4

Fitch: n.r. Fixed-line RGUs: 17.94m 18.06m

Bond ratings: B3 (Moody’s), B (S&P) Mobile subscribers: 21.84m 21.16m

Strengths/Opportunities Weaknesses/Threats

• Scale and product diversification positions the company well to

benefit from the convergence trend

• Proven track-record in identifying attractive acquisition targets

and performing successful turnarounds

• High exposure to difficult macro-economic environments

(France/Portugal) and a highly competitive market (France)

• Aggressive, debt-heavy acquisitions left the company’s credit

metrics with almost no headroom at the current rating level

France Israel Portugal (w/o PT) Other

Brands

Numericable, coditel, Tricom, Orange, Outremer, Le

Cable, Green.CH, SporTV and MCS, Wanachi Group,

Auberimmo

Market position Cable and fibre leaderLeader in cable and

growing player in mobile

Cable leader and B2B

operatorBeLux: Dom. Rep.: French OTT:

Fixed broadband

Mobile - - -

Pay TV

Revenue; EBITDA (€m) 11,436; 3,098 857; 412 183;58 76;51 607;283 234;106

1

2 1 1

2 1 2 2 2

1 2 2

2 14

http://fr.wikipedia.org/wiki/Fichier:Logo_altice_group.png


Company snapshot Strong margin improvements for Altice International

Altice S.A. (Altice) is a Luxembourg-based holding company,

which through its subsidiaries Altice France (Numericable-

SFR) and Altice International operates a multinational cable

and telecommunications business providing pay-TV,

broadband internet, fixed-line and mobile telephony services.

Numericable-SFR’s activities are restricted to France while

Altice International currently has a presence in Israel,

Dominican Republic, French Overseas and Western Europe.

The Amsterdam-listed company was founded in 2001 by

Franco-Israeli entrepreneur and billionaire Patrick Drahi, who

still controls the company through his investment vehicle

Next L.P. He fashioned Altice after Liberty Global, the

world’s largest international cable company Mr Drahi once

worked for. Both companies operate with a more leveraged

profile than their peers to help fund attractive acquisitions

which they turnaround through synergies and sheer scale.

Recent developments & Outlook

Altice has emerged out of relative obscurity, becoming one of

Europe’s most aggressive acquirers, shifting the competitive

landscape among European telecoms. In the last twelve

months alone, Altice splashed more than €28bn on

acquisitions. The company bought PT Portugal through its

subsidiary Altice International for €7.4bn, adding the mobile

market leader to the two operators it owns in Portugal.

France’s number two mobile operator SFR was acquired for

€17bn and merged with Numericable, Altice’s cable business

in France. End of February, Altice tightened its grip on SFR

by acquiring Vivendi’s remaining 20% stake, increasing its

ownership to 80%.

The company is a leading proponent of consolidation and

convergence between cable, broadband, fixed-line and mobile

services. Altice CEO Dexter Goei therefore announced a

continuation of the rapid expansion by taking advantage of

the low interest rates environment to challenge the region’s

established telecoms. At the next level, we expect Altice to

push its subsidiary Numericable-SFR towards acquiring

Bouygues. The group has made no secret of its desire to buy

France’s number three mobile operator as it sees significant

synergy potential, however the Bouygues conglomerate has

reiterated that it was not interested in selling its telecoms unit.

In spite of the ongoing damaging price war in the French

telecoms market and the resulting profit slide in 2014,

Bouygues Telecoms insists that it can survive alone. We see a

merger of both companies as a necessity for a market repair in

France. Even though convergence possibilities emerging from

the Numericable-SFR consolidation should further soften

Altice France’s ARPU decline, M&A driven synergies on the

opex and capex side would be necessary to stabilise or even

increase profit margins and operating free cash flow.

Cable ARPU is at least stabilising for Altice

Increased diversification from the acquisition of PT

Significant upside potential for Altice France

Sources: Company data, Berenberg Research

0%

15%

30%

45%

60%

75%

0

2,500

5,000

7,500

10,000

12,500

'13 '14 '13 '14 '13 '14 '13 '14 '13 '14 '13 '14

France Israel Dom.Rep.

Portugal FrenchOST

Others

EBITDA (in €m) Revenue (in €m) EBITDA margin (rhs)

0

10

20

30

40

50

60

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500

750

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1,500

'13 '14 '13 '14 '13 '14 '13 '14 '13 '14 '13 '14

France Israel Dom.Rep.

Portugal FrenchOST

BeNeLux

RG

U's

Pay TV Broadband Telephone ARPU (in €, rhs)

85%

6%4%1%4%

71%

5%

4%

17%

2%

France Israel Dom. Rep. Portugal Other

2014 Revenue

split pre PT acquisition

2014 Revenue split post PT acquisition

0%

10%

20%

30%

40%

50%

60%

Altice France PortugalTelecom

AlticeInternational

Telenet Ziggo

2014

EB

ITD

A m

arg

in


Credit metrics & rating agencies’ view Debt/EBITDA

Altice’s credit metrics reflect its two-year acquisition spree that

has mostly been financed with high yield debt. In April 2014,

Altice S.A. together with its subsidiary Numericable issued the

largest high yield bond package on record, at $16.7bn, to fund

part of Numericable’s SFR acquisition. End of January 2015,

the holding company together with its subsidiary Altice

International tapped primary debt markets again with a €4.7bn

multi tranche issue to finance the €5.6bn cash payment for its

acquisition of PT’s Portuguese assets. The latest deal was

approved in February, with Altice S.A. and Numericable-SFR

acquiring Vivendi’s remaining 20% stake in Numericable-SFR

partly funded by drawings on RCFs and balance sheet cash.

The rapid pace of deals has led to questions about the high

levels of debt carried by the group. However, as Moody’s

highlights, on the one hand the relevant debt definition for the

incurrence tests under the company’s long-term debt

instruments (incl. 4x Debt/EBITDA leverage test) excludes

debt-like items such as pensions or put options. On the other

hand, EBITDA includes expected synergies and cost savings

up-front. That said, the ability of all credit pools within the

group to incur additional debt is ultimately governed by the

Altice S.A. indentures, under which the Altice Group of

companies has essentially exhausted its point-in-time debt

capacity by raising the Portugal Telecom acquisition debt. S&P

views the latest Vivendi deal as broadly neutral because i.a.

previously included in debt €750m earnout to Vivendi will be

cancelled as part of the transaction. However, Altice remains

close to a downgrade due to a potential earnings related

leverage increase.

For 2015, S&P in its base-case operating scenario expects

EBITDA to remain almost stable, FFO to debt at 11% and

debt to EBITDA of about 5.9x (5.5x if 10% Vivendi stake

acquisition is equity-funded). The rating agency further

assesses Altice’s liquidity position as “adequate”, supported by

meaningful cash, the availability of backup facilities, and no

meaningful debt maturities until 2019. S&P expects Altice’s

sources of liquidity to cover uses more than 1.2x in 2015.

FFO interest coverage

Maturity profile

Sources: Company data, Moody’s, S&P, Berenberg Research

Positive rating drivers Rating constraints

• Scope, scale and geographic diversification of activities (Moody’s)

• Strong competitive market positions (Moody’s/S&P)

• Encouraging success in improving margins (Moody’s)

• Industrial logic of acquisitions and its significant cost saving potential

• Exposure to difficult macro-economic environments (Moody’s)

• High exposure to the very competitive French market (Moody’s)

• Aggressive, debt-heavy-financed acquisition strategy (Moody’s)

• High fully consolidated leverage (Moody’s, S&P)

Upward pressure could arise from… Downward rating pressure could arise from…

• Leverage ratio around 5.0x /4.5x (S&P/Moody’s)

• Successful acquisition integrations (Moody’s/S&P)

• Slowdown in the top-line revenue decline of core assets (S&P)

• Leverage exceeding 6.0x/5.5x (S&P/Moody’s)

• Missing turnaround of SFR’s EBITDA (S&P)

• No successful integration of newly acquired companies (S&P)

• Deteriorating liquidity (Moody’s)

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

2012 2013 2014e

Debt / EBITDA

threshold for down-ward rating pressure

threshold for upward rating pressure

0.0x

1.0x

2.0x

3.0x

4.0x

2012 2013 2014e


threshold for downwardrating pressure


251

3,1714,131

9,950

2,571 2,574 2,398

0

2,000

4,000

6,000

8,000

10,000

12,000

2017 2018 2019 2020 2021 2022 2023 2024 2025

(€m

)

Senior secured notes Senior notes Unsecured notes Loans


ALTICE INTERNATIONAL

Bloomberg Ticker: ALTICE <Corp>

(Altice Finco/Financing) Recommendations:

Overweight/Marketweight


ALTICE 8 12/19 (Financing) 107.9 232bps 2.4% 12/15 @ 104.0 €210m Overweight

ALTICE 6 ½ 01/22 (Financing) 108.4 405bps 4.1% 12/16 @ 104.9 €300m Overweight

ALTICE 5 ¼ 02/23(Financing) 105.3 391bps 4.2% 02/18 @ 103.9 €500m Marketweight

ALTICE 9 06/23 (Finco) 116.9 445bps 4.6% 06/18 @ 104.5 €250m Marketweight

Sources: Bloomberg, Company data, Berenberg Research; *pro forma consolidated (w/o PT)


Altice International operates through its indirect subsidiaries a multinational telecommunications business with a strong

presence in Western Europe, Israel, Dominican Republic and French overseas. Thus, Altice International (previously known

as Altice VII) is the holding company for all Altice subsidiaries (including Portugal Telecom) except for Numericable-SFR

(Altice France). Compared to Altice France, Altice International has already demonstrated the successful realisation of its

business model “acquiring & restructuring” by boosting margins in almost all of its markets. When further comparing both of

Altice S.A.’s key entities, we also prefer Altice International’s lower leverage, the healthier markets the company operates in

and the lower risk to experience another near-term re-leveraging acquisition. Moreover, the ALTICE 8 12/19 and the

ALTICE 6 ½ 01/22 offer considerable spread tightening potential towards their CDS curve, also emphasised by a comparison

with the closest peers.

Revenue split pre PT acquisition 2014 Revenue split post PT acquisition 2014 Revenue split by products pre PT in 2014

Company data


Headquarter: Luxembourg Revenue (€m): 2,070 2,028

Market cap/employees: €5.1bn (estimated w/o PT)/c11,200 EBITDA (€m): 803 936

Major shareholders: Altice S.A. (100%) Operating FCF (€m): 399 513


Moody’s: Financing: B1/neg, Finco: B3/neg. Weig. Ø cable ARPU: €39.6 €40.8

Standard & Poor’s: Financing: BB-, Finco: B- (bonds only) Weig. Ø mobile ARPU: €16.5 €15.3


Bond ratings: Moody’s: Financing: B1, Finco: B3 Mobile subscribers: 4.80m 4.92m


• Encouraging results in improving margins (Israel, Portugal)

• PT acquisition offers potential of material synergies from areas

such as outsourcing, purchasing and simplification of operating

processes as well as offers convergence possibilities

• High exposure to difficult macro-economic environment

(Portugal)

• Aggressive, debt-heavy acquisitions left the company’s credit

metrics with almost no headroom at the current rating level

Israel 43%

Dom. Rep. 29%

Benelux 4%

Portugal 9%

FOT 12%

Other 4%

Israel 19%

Dom. Rep. 13%

Benelux 2%

Portugal 60%

FOT 5%

Other 2%

Cable 50%

Mobile 39%

Others 11%


Company snapshot

Revenues & profitability of Altice International

Altice International is a Luxembourg-based holding company,

which through its indirect subsidiaries operates a multinational

telecommunications business with a strong presence in

Western Europe, Israel, Dominican Republic and French

overseas. Thus, Altice International (previously known as

Altice VII) is the holding company for all Altice subsidiaries

(including Portugal Telecom) except for Numericable-SFR.


Compared to Altice France, Altice International has already

demonstrated a successful realisation of its business model of

“acquiring & restructuring” by boosting margins in Israel

(+7ppt yoy to 48% EBITDA margin in 2014), French

Overseas (+8ppt to 45%) and especially in the Dominican

Republic (+10ppt to 47%). Due to the geographic dispersion

of these businesses, material synergies between them are

limited, thus the profitability improvements are mostly

attributable to management’s ability to turnaround weak

operations.

Rather than on top-line growth, management focusses on

generating profits by improving operating performance driven

by cost reductions. Sustaining the improvements Overseas, in

Benelux and in Israel and realising new ones for the recently

acquired Portuguese assets of Portugal Telecom is the new

objective for the management team.

Portugal Telecom is not merely a European operator, it is the

dominant player on the Portuguese telco stage, boasting

leading positions in fixed broadband and pay-TV, and having

one of the most extensive fibre networks in Europe with

about 60% of Portuguese households covered.

Portugal Telecom already earns margins that are well above

the level of previously acquired companies, however, still with

a somewhat 10ppt gap to Altice International’s group margin.

Altice sees considerable synergies in combining Portugal

Telecom with its Portuguese cable businesses Cabovisao and

Oni, driving consolidation in the market, allowing quad-play

offerings, cost cuttings and improving procurement. The

combined entities claim over 50% broadband market share

and leading positions in most segments of the Portuguese

telecom market.

Despite the still difficult – although improving – macro-

environment, we share Altice International’s positive

operational outlook for its Portuguese investments. We expect

convergence to stabilise on the top-line while scale and

efficient management reduce costs, thus bumping up margins.

However, the Portugal Telecom 50% EBITDA margin target

announced by Altice’s management appears quite ambitious to

us (€140m synergies over the medium term).

All subsidiaries improved their EBITDA margin in 2014

Successful EBITDA margin expansion 2014 vs. 2013

Almost 10ppt upside for newly acquired PT


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2012 2013 2014Revenue (€m) EBITDA (€m)

OpFCF (€m) EBITDA margin (rhs)

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'13 '14 '13 '14 '13 '14 '13 '14 '13 '14

Israel Dom. Rep. Portugal French OST Others

EBITDA (in €m) Revenue (in €m) EBITDA margin (rhs)

68%

48% 45%

47%

0.0

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10.0

12.0

Benelux Israel FOT Dom. Rep.

pts

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Altice France PortugalTelecom

AlticeInternational

Telenet Ziggo

2014

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Credit metrics & rating agencies’ view

Debt/EBITDA

Similar to Altice S.A., Altice International’s credit metrics

reflect a period of rapid growth that has mostly been financed

with high yield debt. The last tap took place end of January

2015, with Altice International successfully placing a € €4.7bn

multi tranche issue together with its holding company Altice

S.A. to finance the €5.6bn cash payment for its acquisition of

PT’s Portuguese assets.

Altice International’s acquisitions mark a very distinct pattern:

targets such as Portugal Telecom have EBITDA margins that

are well off the pace of the group level, offering scope for

earnings improvements and free cash flow improvements.

However, in contrast to the SFR deal, which was initially seen

credit positive by the rating agencies, the acquisition of

Portugal Telecom has lead to negative reactions of both S&P

and Moody’s, resulting in an outlook downgrade to negative.

The outlook reflects the impact of the all-debt financed

transaction on leverage as well as the considerable integration

and execution risks. We only see a potential one-notch

downgrade in relation with further debt-financed acquisitions

of Altice International, which is by far less likely compared to

Numericable-SFR with its inherent Bouygues acquisition risk.

Our expectations with regard to cash flows are of a more

positive kind: Altice International’s existing networks are

generally well invested with some exceptions such as Israel

where the rollout of 3G and 4G will continue to be capex-

heavy. Nevertheless, we expect Altice International’s overall

capex needs to be low in the years to come, in particular

compared to its closest competitors. Due to its future-proof

cable-heavy network infrastructure, we expect to see limited

investment pressure, which together with a continued positive

impact from cost synergies should allow for positive free cash

flow generation at the various geographic asset pools before

dividend up-streaming. Moreover, expected cash generation at

the operating subsidiary level is expected to cover the

company’s near-term liquidity needs in the ordinary course of

business. The net leverage covenant has recently increased to

5.25x, offering tolerance for all facilities.


Maturity profile



• Increased scale & scope from the PT acquisition (Moody’s)

• High cost cutting and synergy potential at recent acquisitions

(Moody’s)

• Geographic diversification (Moody’s)

• Rapid pace of acquisition activity & geographic expansion (Moody’s)

• All-debt-financed nature of the PT acquisition (Moody’s)

• High exposure to difficult macro environ. in Portugal (Moody’s)

• Complexity of the company’s capital structure (Moody’s)

Upward rating pressure could arise from… Downward rating pressure could arise from…

• Leverage well below 4.0x on a sustainable basis (Moody’s)

• Visible levels of free cash flow generation (Moody’s)

• Leverage exceeding 5.0x for a sustained period of time (Moody’s)

• Material setbacks in integrating acquisitions (Moody’s)

• Any additional material acquisition (Moody’s)


0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

2011 2012 2013 2014e

Debt / EBITDA



0.0x

1.0x

2.0x

3.0x

4.0x

2011 2012 2013 2014e




251

1,435

351

1,885

2,571

330 340

0

500

1,000

1,500

2,000

2,500

3,000

2017 2018 2019 2020 2021 2022 2023 2024 2025

(€m

)

Senior secured notes Senior notes

Unsecured notes Term loans


ALTICE FRANCE (Numericable-SFR)

Bloomberg Ticker: NUMFP <Corp>

Recommendations:

Marketweight


NUMFP 5 ⅜ 05/22 104.1 419bps 4.5% 05/17 @ 104.0 €1000m Marketweight

NUMFP 5 ⅝ 05/24 105.1 438bps 4.8% 05/19 @ 102.8 €1250m Marketweight

Sources: Bloomberg, Company data, Berenberg Research; *pro forma consolidated (incl. SFR)


Paris-based Numericable-SFR is the second largest provider of telecommunications services in France, which is the most

important market for the Altice Group, generating around 85% of revenues (pre PT consolidation). This share will further

increase if French media, construction and telecoms conglomerate Bouygues changed its mind about selling its Telecoms

business to Numericable-SFR. Altice has made no secret of its desire to buy France’s number three mobile operator as it sees

significant synergy potential. Similar as for its most recent acquisition, Vivendi’s telecom arm SFR, where synergies from

capex savings (optimisation of networks, fibre rollout, procurement), opex reductions (sales & marketing, network operations)

and revenue synergies (service bundles & less competition) are expected to be realised from 2015 on. The potential Bouygues

acquisition raises considerable re-leveraging concerns. We expect at least Moody’s to one-notch downgrade the company

which explains the current spread levels at lower B1 comparable peers. Moreover, both bonds the NUMFP 5 ⅜ 05/22 and

the NUMFP 5 ⅝ 05/24 trade close to their CDS curve. We therefore initiate with a marketweight recommendation.

Numericable-SFR Group key figures 2014

Company data


Headquarter: Paris (France) Revenue (€m): 12,039 11,436

Market cap/employees: €25.5bn/11,800 EBITDA (€m): 3,485 3,098

Major shareholders: Altice S.A. (80%) Operating FCF (€m): 1,555 1,317


Moody’s: Ba3/watch negative Cable ARPU: €41.3 €41.0

Standard & Poor’s: B+/negative Mobile ARPU: €23.9 €22.5


Bond ratings: -- Mobile subscribers: 17.04m 16.24m


• Strong competitive advantage through future-proof cable

networks

• Significant synergy potential from opex and capex savings

following the SFR merger

• Highly leveraged, with no easing signs due to unsatisfied M&A

appetite and potential Bouygues deal

• High integration and execution risks in a highly competitive and

saturated market (France)

Fix Data

8.2 million

households

subscribing to at least

high speed broadband

Voice -

Mobile

~23 million

mobile customers

4G Data3G Data

More than 75% of

the population

covered with very

high speed mobile

broadband

More than 99% of

the population

covered by the

3G+ network

Voice - Fix

Business

More than 250

carrier customers

Fixed-line, MVNO,

International

190.000 business

customers


Company snapshot Numericable-SFR deal had a stabilising impact SFR’s

EBITDA margin Numericable-SFR, headquartered in Paris (France), is the

second largest provider of telecommunications services in

France. Numericable-SFR’s controlling shareholder (80%) is

Luxembourg-based Altice S.A.

Numericable was formed through the consolidation of all of

the major cable operators in France over the past decade,

including TDF Cable, NC Numericable, France Telecom

Cable and Completel. Following first triple-play marketing in

2009, the company started quad-play offerings including

mobile services via an MVNO agreement with Bouygues

Telecom in 2011 before it finally merged with mobile operator

SFR in 2014.


As of today, France is the most important region for the Altice

Group, generating around 85% of revenues (pre PT

consolidation). This share would further increase if French

media, construction and telecoms conglomerate Bouygues

changes its mind about selling its Telecoms business to

Numericable-SFR. Altice France has made no secret of its

desire to buy France’s number three mobile operator as it sees

significant synergy potential.

Similar as for its most recent acquisition, the Vivend’s telecom

arm SFR, where synergies from capex savings (optimisation of

networks, fibre rollout, procurement), opex reduction (sales &

marketing, network operations) and revenue synergies should

already come to effect from 2015 on. The SFR deal had a

clearly positive impact on Altice France’s business profile,

hence Moody’s placed its B1 rating on review for upgrade

following the announcement in April 2014. However, the new

number two operator in the French telecommunications

market has some clear obstacles to face in the current year: (i)

a still weakening operating performance of SFR with limited

growth prospects in a highly saturated market, (ii) ambitious

synergy targets are likely to absorb Numericable’s management

capacities for the coming years and (iii) additional investment

needs in the mobile network to remain competitive.

A combination with Bouygues Telecom might help ease the

competitive pressure and generate substantial synergies.

However, in spite of the ongoing damaging price war in the

French telecoms market and the resulting profit slide in 2014,

Bouygues Telecoms insists that it can survive alone.

We see a merger of both companies as a necessity for a market

repair in France. Even though convergence possibilities

emerging from the Numericable SFR consolidation should

further soften Altice France’s ARPU decline, further M&A

driven synergies on the opex and capex side would be

necessary to stabilise or even increase profit margins and

operating free cash flow.

Numericable-SFR is the second largest mobile operator

Number three in the French fixed-line market

Maintenance offers great capex savings potential


0%

10%

20%

30%

40%

50%

2011 2012 2013 2014

Numericable SFR

Orange 35.8%

Numericable-SFR 28.1%

Iliad 13.1%

Bouygues 11.5%

MVNO's 11.5%

Orange 42.7%

Numericable-SFR 21.5%

Iliad 25.3%

Bouygues 10.5%

Maintenance 51%

Customer Acquisition

21%

Network Upgrade 28%

€1,781m15.6% of total revenue


Credit metrics & rating agencies’ view

Debt/EBITDA

In April 2014, Numericable together with its TopCo Altice

S.A. issued the largest high yield bond on record, at $16.7bn,

to fund part of Numericable’s SFR acquisition. The SFR deal

left the new Numericable-SFR highly leveraged, which is

about to increase further as a consequence of the latest deal

approved in February 2015: Numericable-SFR together with

Altice S.A. acquires Vivendi’s remaining 20% stake in

Numericable-SFR. The €3.9bn purchase price will be split

equally. Nummericable-SFR’s intends to acquire its €1.95bn

stake through a share buyback programme, funded by

drawings on its RCFs and cash on its balance sheet. Altice

S.A.’s payment has to be made by April 2016 and is secured

through a bank guarantee.

Both rating agencies reacted by downgrading their outlook on

Numericable-SFR to negative. Moody’s even placed the

ratings under review for downgrade. The agency sees

significant uncertainties about the funding of the €1.95bn

share repurchase programme and its impact on Numericable-

SFR’s liquidity, leverage and operational flexibility. Both

agencies view the transaction as aggressive given the only

recently closed acquisition of SFR and the early stage of

integration. However, S&P overall expects the transaction to

have no significant impact on credit metrics as a planned

€750m earnout to Vivendi will be cancelled as part of the

transaction and most of excess cash was previously assumed

to be upstreamed as dividends to shareholders.

However, a large portion of the upcoming Numericable-SFR

free cash flow will be distributed to shareholders as the holdco

Altice S.A. needs to cover interest payments on €6.2bn of

holdco debt (including debt for the PT acquisition) at the

holdco level.

For 2015, S&P forecasts an adjusted debt/EBITDA slightly

above 4.0x for Numericable-SFR, still considerably lower than

the consolidated group average. However, the assumption

does not factor in any business combination with Bouygues

Telecom in the context of a consolidation of the French

mobile market, which Moody’s believes could occur over time.


Maturity profile



• SFR merger should lead to synergies from capex savings, opex

reductions and revenue synergies (Moody’s)

• Company’s significant leverage, also on the holdco level (Moody’s)

• Significant integration and execution risks (Moody’s)

• Exposure to a highly competitive and saturated market (Moody’s)

Upward rating pressure could arise from… Downward rating pressure could arise from…

• Leverage below 3.75x on an ongoing basis (Moody’s)

• Free cash flow/debt ratio greater than 10% (Moody’s)

• Success in broadly achieving synergy and cost savings targets

(Moody’s)

• Leverage exceeding 6.0x/5.5x (S&P/Moody’s)

• Missing turnaround of SFR’s EBITDA (S&P)

• No successful integration of newly acquired companies (S&P)


0.0x

1.5x

3.0x

4.5x

6.0x

7.5x

2011 2012 2013 2014e

Debt / EBITDA



0.0x

1.5x

3.0x

4.5x

6.0x

2011 2012 2013 2014e


threshold for down-ward rating pressure


1,736

3,780 3,893

2,244

0

2,000

4,000

6,000

2018 2019 2020 2021 2022 2023 2024

(€m

)

Senior Secured Notes Loans


Please note that the use of this research report is subject to the conditions and restrictions set forth in the

“General investment-related disclosures” and the “Legal disclaimer” at the end of this document.

For analyst certification and remarks regarding foreign investors and country-specific disclosures, please

refer to the respective paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)

Company Disclosures

Altice S.A. no disclosures

Altice International S.a.r.l no disclosures

Numericable-SFR SAS no disclosures

(1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering of this company.

(2) The Bank acts as Designated Sponsor for this company.

(3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for

investment banking services or received compensation or a promise to pay from this company for investment

banking services.

(4) The Bank and/or its affiliate(s) holds 5 % or more of the share capital of this company.

(5) The Bank holds a trading position in shares of this company.

Initiation of coverage: 25 March 2015

Historical recommendation changes for ATCNA 7 1/4 05/22 in the last 12 months

Date Recommendation

25 March 2015 Overweight

Historical recommendation changes for ATCNA 6 1/4 02/25 in the last 12 months

Date Recommendation

25 March 2015 Marketweight

Historical recommendation changes for ALTICE 8 12/19 in the last 12 months

Date Recommendation


Historical recommendation changes for ALTICE 6 1/2 01/22 in the last 12 months

Date Recommendation



Historical recommendation changes for ALTICE 5 1/4 02/23 in the last 12 months

Date Recommendation


Historical recommendation changes for ALTICE 9 06/23 in the last 12 months

Date Recommendation


Historical recommendation changes for NUMFP 5 3/8 05/22 in the last 12 months

Date Recommendation


Historical recommendation changes for NUMFP 5 5/8 05/24 in the last 12 months

Date Recommendation


Berenberg distribution of recommendations and in proportion to investment banking services

Overweight 25.64 % 9.09 %

Underweight 26.50 % 18.18 %

Marketweight 47.86 % 72.73 %

Valuation basis / recommendation key

Overweight: Sustainable spread tightening potential higher 10% within 3-6 months.

Underweight: Sustainable spread widening potential lower 10% within 3-6 months.

Marketweight: Limited spread movement potential. No immediate catalyst visible.

NB The Bank’s Fixed Income Research Department does not make recommendations on the basis of

absolute performance, but on performance expected relative to the market or peer group as spreads move

with markets and sectors as well as with the issuer itself.

Competent supervisory authority

Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority),

Graurheindorfer Straße 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt am Main

General investment-related disclosures

Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“) has made every effort to carefully research

all information contained in this financial analysis. The information on which the financial analysis is based has been

obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the

relevant specialised press as well as the company which is the subject of this financial analysis.


Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is

necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the

research note.

Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this

document. We do not commit ourselves in advance to whether and in which intervals an update is made. The

companies analysed by the Bank are divided into two groups: “full coverage“ - continued updates - and “screening

coverage“ - updates as and when required in irregular intervals.

The functional job title of the person/s responsible for the recommendations contained in this report is “Fixed-

Income Research Analyst” unless otherwise stated on the cover.

The following internet link provides further remarks on our financial analyses:

https://www.berenberg.de/en/fir_en.html

Legal disclaimer

This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“). This

document does not claim completeness regarding all the information on the stocks, stock markets or developments

referred to in it.

On no account should the document be regarded as a substitute for the recipient procuring information for

himself/herself or exercising his/her own judgements.

The document has been produced for information purposes for institutional clients or market professionals.

Private customers, into whose possession this document comes, should discuss possible investment decisions with

their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this

document.

This document is not a solicitation or an offer to buy or sell the mentioned stock.

The document may include certain descriptions, statements, estimates, and conclusions underlining potential market

and company development. These reflect assumptions, which may turn out to be incorrect. The Bank and/or its

employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the

use of this document or any part of its content.

The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document,

derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any

securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital

market or underwriting services.

Analyst certification

I, Alexandre Daniel, hereby certify that all of the views expressed in this report accurately reflect my personal views

about any and all of the subject securities or issuers discussed herein.

In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the

specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking

transaction performed by the Bank or its affiliates.

Remarks regarding foreign investors

The preparation of this document is subject to regulation by German law. The distribution of this document in other

jurisdictions may be restricted by law, and persons into whose possession this document comes should inform

themselves about, and observe, any such restrictions.

https://www.berenberg.de/en/fir_en.html


United Kingdom

This document is meant exclusively for institutional investors and market professionals but not for private customers.

It is not for distribution to or the use of private investors or private customers.

United States of America

This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the

Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC

does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC.

In addition, this document is meant exclusively for institutional investors and market professionals, but not for private

customers. It is not for distribution to or the use of private investors or private customers.

This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC

(+1 617.292.8200), if you require additional information.

Third-party research disclosures

Company Disclosures

Altice S.A. no disclosures

Altice International S.a.r.l no disclosures

Numericable-SFR SAS no disclosures

(1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject

company by the end of the prior month.*

(2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering

for the subject company.*

(3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report.

(4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or

expects to receive such compensation in the next 3 months.*

(5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the

analyst knows or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of

section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.

Copyright

The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied,

photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent.

© June 2014 Joh. Berenberg, Gossler & Co. KG


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