Since the start of the year we have been somewhat frustrated by the trends in the European high yield market. Many smaller and inherently riskier companies have recently come to market, while we have also seen little value in broader new issuance. This has led us to reduce our allocation to high yield debt since the beginning of 2014.
However, more recently we have seen signs of encouragement, with some attractive ‘mega deals’ coming to market. This was particularly evident on Monday 14 April in the unveiling of the blockbuster Numericable and Altice bond issue, which is set to become Europe’s largest ever high yield deal.
Numericable and its holding company Altice outlined plans to issue about €12.6bn in bonds to fund the acquisition of French telecom company SFR from Vivendi. The deal comprises of €8.4bn Numericable bonds — split into 5-year, 8-year and 10-year tranches — and €4.15bn of 8-year Altice bonds. Both are offering dollar and euro tranches. Numericable's debt deal will be the largest ever European high yield sale, higher than the $5.7bn raised by NXP Semiconductors Netherlands BV in 2006, according to Dealogic.
The Numericable and Altice deal comes just days after Italian telecom company Wind unveiled a €3.75bn refinancing of its existing bonds. Given the size of the deal, these bonds priced cheap and rallied on issue. Wind is a known entity, having been an issuer in the high yield market since 2005.
Similar to Wind, an attractive new issue premium will be needed to ensure the large Numericable and Altice deal attracts sufficient investment. Investors are anticipating a yield premium of 50-75bp to compensate for the huge quantum of debt to be issued. As with Wind, Numericable and Altice are both known to high yield investors, having issued bonds before.
Another positive aspect of the larger deals is that they tend to have credit derivative contracts created against the bonds. This ensures a portfolio manager can easily hedge out exposure in the future should anything change with the story. The small deals do not have this option.
These large deals have recently been the exception, not the norm. We have been frustrated at the number of small high yield deals that have been coming to market this year. For example, just recently hair straightener and hairdryer manufacturer GHD issued bonds, even though the company only has an EBITDA* of £32m. Historically, smaller deals have had a higher default rate and lower recovery rate, hence they are higher risk. We do not feel that this has been reflected in the pricing of many of these deals this year.
A fourfold symmetry to the deal
Large business with a reason to exist
The proposed deal will fund the acquisition of SFR by Numericable, with the combined entity having generated €11.5bn of revenues and €3.4bn of EBITDA in 2013. This will create the number one player in high-speed broadband in France, and the number two player in mobile. This positions the group well to seize new opportunities arising from fixed mobile convergence in the French market, including through leveraging the strong and trusted SFR brand. We are also encouraged by political backing for consolidation in the French mobile market, which could potentially lead to some level of price repair in the mobile market and provide upside to future operating estimates at Numericable/SFR. The new business sits in a defensive sector that is well understood by high yield investors, both in Europe and the US.
Manageable leverage and good free cash flow
Net leverage will stand at 3.1x through the Numericable/SFR group and 4.1x for the Altice parent company, which is fairly conservative for a cash generative cable and mobile business. We view the SFR price tag as reasonable and management is guiding to achieve €350m of EBITDA synergies within the next 12-18 months, which we see as conservative and achievable. Over the longer term, we expect the company to target €730m of run rate EBITDA synergies by 2017.
Strong and entrepreneurial shareholder support
Patrick Drahi, the founder and controlling shareholder of Altice, is set to be appointed chairman of the new Numericable/SFR Group. He has spent 20 years owning and managing cable and telecommunications companies globally. While Drahi has a large percentage of his personal fortune invested in Altice, bond investors in the new deal will rank ahead in seniority to his investments, which should provide some comfort. Both the Numericable/SFR senior management team and Altice senior management team have extensive experience in the cable and telecommunications sectors and both entities will remain publicly listed post the transaction.
Attractive pricing
Given the size of the deal — €12.6bn of bond financing and €3.2bn of loan financing — investors are anticipating an additional 50-75bp of new issue premium to compensate for the very large size of the debt issue. This will be the biggest European high yield bond sale on record and we are looking to take advantage of this. This fits well with our preference for larger sized bond offerings, which tend to provide a greater level of liquidity compared to smaller sized deals.
*Earnings before interest, tax, depreciation and amortization
