March saw the launch of jumbo high yield transactions by Altice and Numericable, which was part of the financing for the acquisition of the French telecom group SFR. After an extensive marketing period, the group issued €7.9 billion equivalent in bonds (plus €3.78 billion equivalent in loans) from the operating company Numericable, along with €4.15 billion equivalent from the Altice holding company. The order books for the Numericable bonds totalled €44.2 billion equivalent, while the Altice orders totalled €26.3 billion, making the transaction the largest European high yield deal in history. As expected for a deal where demand heavily outstrips supply, all the bond tranches traded immediately higher on the break, with the shorter five year bonds up 1-1.5 points and the longer dated Altice bonds up 4-4.75 points.
This deal illustrates a number of dynamics that continue to impact the European high yield market and particularly the telecom/cable sector.
Firstly, there remains a considerable amount of demand chasing yield in the system (as the order book of €70 billion shows) as is the confidence of the borrower to launch a €12 billion deal into the European HY market. This is supportive from a technical point of view and supports our view that even though some parts of the market are trading at credit spreads through the historic means, this tightening momentum looks set to continue and we expect this asset class to become more expensive before this stage of the cycle is over. Of course, this tightening bias is unlikely to move in a straight line as periods of volatility are likely, but we do believe that a major negative event will be necessary to derail the current trend. Continued central bank intervention, low default rates and gradual improvements in global growth lend support to the steady tightening and this backdrop looks set to continue for the medium term.
Secondly, the European telecom/cable sector looks ready to undergo a period of significant consolidation. Economies of scale, a quad play offer (broadband, fixed telephony, mobile telephony and TV) and the need for faster and stronger networks will drive this process. In the specific case of Numericable and SFR, the synergies of a shared network, including the gradual migration of SFR customers to Numericable’s cable TV platform (which offer the company the highest margins) were overwhelming.
It also worth noting that Vivendi (who are a significant player in this sector) have just received payment of €13.5 billion for its SFR stake. The big question is what will they do with this windfall? This is the same question we asked ourselves when Vodafone sold its stake in Verizon Wireless. Since the Vodafone deal took place, the company returned cash to its shareholders but also acquired the Spanish cable operator Ono and we do not think this will be the last news we hear about Vodafone M&A activity. The case of Vivendi is obviously different; they are focusing more on their core media assets and consequently selling their telecom operations. However, they have €13.5 billion of cash and they will have a strategy on where to utilise this. One possibility could be an expansion of their subsidiary, Canal+, which in turn holds a 49 per cent stake (and a call option on the remaining 51 per cent) in TVN, a Polish media group that operates 10 TV channels in the country. Does this recent €13.5 billion cash windfall increase the likelihood of them exercising those calls and increasing their TVN stake? We think it probably does.
The overall size and strong reception for this latest deal bodes well for M&A activity in general, but it also highlights the large amount of money that is still looking for a home and the good shape of the high yield market for the right transaction.
It also supports our view that a major negative event is required for the current tightening bias to change course, despite valuations being less attractive now than they have been recently and also from an historical point of view.
Alistair Wilson is head of institutional business at TwentyFour Asset Management