Chit Chat Stocks - Francisco Olivera | Altice USA (ATUS)

Episode Date: December 7, 2020

On the 7th day of Christmas Francisco Olivera gives to you, Altice USA the cable company based out of New York. Altice provides more than just cable television to its customers. Francisco walks Chit Chat Money through how Altice provides internet, phone, and original content. Visit our website: https://www.chitchatmoney.com/ Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to 25 Stocks at Christmas presented by Chit Chat Money. Today we have an interview with Francisco Oliveira and we talk Altice USA or is it Altice? We'll find out because we're recording this pre-handling. That's right, we are. And Francisco, from what we know, is sort of a media expert and so this is sort of right up his alley. They are one of the largest broadband communications and video services in the U.S. so it's going to be interesting it's going to be fun but before we get to that we have a word from our partners i think it's my turn for the sales pitch good so it's ten dollars off at your seven investing membership it's one month you don't have to renew it you're not locked into anything it's just one month seven bucks all together for seven picks plus the picks are on

fire so i mean it's gonna pay for itself they have yeah great compounded returns you can check out their returns on on their site um it's been fantastic you get some you know 10 bucks off the first month it's a sweet deal no lock-in so try it out see if you like it all you gotta do is use code ccm at checkout here we go welcome to chit chat money on this show host ryan henderson and brett schaefer interview industry experts and riff on the world of investment as a quick reminder Chitchat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode.

Today, we are welcomed by Francisco Oliveira. I am going to let Francisco introduce himself. So what do you do now and how'd you get into the world of investing? Yes. Great to be with you guys here today. I run an investment fund in San Juan, Puerto Rico called Aribilo Capital Fund. Got into investing, got the investing bug early, primarily thanks to my dad and reading the Warren Buffett books, Joel Greenblatt, and went to college at Bentley University. went to wall street after that and a couple years later had had the opportunity to start to fund um so yeah that's how and we're talking altice usa today so uh how'd you come across altice altice usa is a the fourth largest cable company in the united states and i came across it i followed i followed the cable industry in the u.s um for many years now um especially since i started

the the fund so primarily through charter and comcast through that lens so when altice went uh public a couple years ago um i always had my eye on it and studied the business just because i follow the industry but it's become a much more interesting business this year as an investment okay and then what does altis do i know it's like a typical uh you know broadband provider cable provider how do they are they really similar to comcast and charter do they have any other businesses you know what does altis do for for investors yeah i i'd say it's it's very similar to charter but charter is a much larger business i would think of charter as a a super regional um with their the scale that they have in the number of broadband subscribers

altice usa is more uh it's the fourth largest in the united states it's cable business but it's much smaller it has about 4.6 4.7 million broadband subscribers it's got a huge uh base in the new york and tri-state area um it's really a combination of two businesses that that were basically merged together by the altis management team which primarily an umbrella of companies that came from europe but altis usa was spun out afterwards and the two businesses were cable vision which was owned by the dolan family if you're familiar with amc networks Madison Square Gardens and the Knicks

he's been a lot for the Knicks so the exactly so they used to oh so Cablevision had used to have AMC networks and the Knicks and the real estate all and the regional sports network all in one company

they basically broke that apart and later Altice bought Cablevision combined it with another smaller cable company called Suttolink and it's more in the southern it's a smaller business but it's more of a southern uh part of the u.s so it's tri-state sort of link uh as well more more of a smaller scale type of cable business um compared to charter okay they own uh they own cheddar too don't they

that's yes yes yes they bought cheddar it was a small acquisition i think it was under maybe if you include earnouts around 300 million uh in that range maybe even lower they do own a some local news channels a very small portion of the the profitability of the business it's hardly material and i think they saw cheddar as an interesting way uh to integrate that with the cable business potentially participate in advertisement opportunities across the news networks but i don't think it's been i don't i don't not sure the chatter acquisition has been an absolute failure but i don't think it's something it's really not something you're betting on when you buy the company at this point okay and then for people may be a bit

like some people who know the cable industry know how it works can you kind of explain a bit how you know they get into households how there's really only one player in these certain regions you know why is that uh because when people look at it they kind of think you know all right well I know they provide Wi-Fi and stuff like that, but they don't really know how it works. Also, what do you, just broadly, what do you like, what drew you to cable? What do you like about that business? I know you're big into cable and media, right? Yes.

So the cable business, what's always been pretty interesting to me is two parts of it. One, you have a relationship with the customer that's a recurring revenue business that they pay their bill monthly to have that relationship with you. it's very real estate like and then the cable business what's interesting to me about it is really it's all about broadband I think sometimes in the media especially going back you know seven years five years ago it's all about the concerns of hey they sell video they sell channels that they sell pay tv that part of the business secular decline but actually the margin that margins in that business uh have been declining for some while so what's attractive to me recurring revenue business broadband is super important it's like you you spoke about earlier

it's really tough to have very two strong competitors in one market let alone three you're basically having to wire uh houses you know dig up the streets or attach to the poles have the plant um acquire the customer market to them very very capital intensive business and if you basically offer the same product have to make this the same amount of capital investment and have a price war with each other um if you have two very strong competitors it's it's it's really a a bad recipe so over time um it's really become more of a one player uh one player industry there's some markets where where they're more dense there's more competition or there's certain subsidies in some states there might be other participants um part of the we can get into

this a little later when you're when you're counterpoints but in in the cable vision area of the business the tri-state area um they have a lot of competition from fiber-based players like verizon files who made a huge investment um that that investments billions billions billions of dollars and it didn't it didn't end up being very profitable for verizon they divested a lot of those assets to players like frontier which ended up going bankrupt so it's a very tough business to given the the capital intensity of it um very infrastructure like getting into the person's home acquiring the customer but after you made the investment and you maintain the plant and you acquire the customer and if you don't have a strong competitors it's basically a very

very high margin business on the broadband side and you have that recurring capital that i talked about talked about earlier it's very real estate like high margin leverageable um so you can put more debt on the balance sheet to to boost equity returns it's not bulletproof i think you know darling today charter communications actually went bankrupt during the financial crisis so you can go you can take things to the limit but if you run those business well given the high margin cultural nature of the business the broadband business it's certainly a product that you really can't live without um there's been some surveys where people would rather like have broadband and milk in their house um and so it's it's extremely you say broadband rather than milk

yeah there's there was a apparently it was a survey a while back it kind of like i was i just kind of laughed at it but um i'm not sure if it's like you know who knows what these surveys right sample size etc but it was kind of funny and and today um with covid it has become even more important right so you've seen a trend where people that maybe had subpar uh internet service maybe a copper player a legacy plant that doesn't provide as fast internet is more likely to subscribe to a high-speed cable broadband uh business and or upgrade their speeds and pay more so it's become it's always been in my mind my framework and looking at things uh i always saw that having high speed internet in your house that's very reliable it's just it's just essential

right the business the economics behind that business because you can have essential businesses without necessarily good economics but the economics behind that business are strong in their recurring nature and high margin i think it's it's a very very attractive business to start with so the importance of the business in my mind of the industry was always going to increase so that's why i think overall the cable business is very attractive to me okay and then so say someone wants to raise their um their speed right how much incremental cost is that for someone like altis is it almost pure margin it's it's almost pure margin yeah it's almost pure margin it you know if if they're if they have to change you know let's say this is a customer that's been

a customer of altis or a regular cable company with a very long time and it has an old modem in their house then there will be some capex associated with that because you need to replace that moment but typically typically it's it's it's a very uh high high margin it's it's not there's not an extra added cost to it okay and then for altis uh specifically i know when i started digging into this i kind of just looked up the ticker on twitter to see what people said and there was some sort of strife about management so what do you think about management just broadly i have a different view i think management hasn't been perfect um when they they made a lot of headlines once they bought cable vision and subtle link and merge them because they basically went

out there and said you know the margins of these u.s cable business are way way too low we're talking about the mid 30 percent even the margin maybe even low 30 percent even the margin business and they were like we're going to take this a lot higher over 40 percent and today altisa's ebitda margins are approaching 50 so when when they said that uh they announced those deals in 2015 when they said that at the time um people were like they're going to destroy the business they're going to do like a 3g capital cost cutting to the bone they're going to take uh investment out of out of the plants it's going to have worse customer service um they when they bought this business it was under an umbrella of their european businesses

so they own cable and wireless businesses in europe and those suffered for other reasons and eventually they ipo'd in the u.s and then the european business had like management fees that they charged to the u.s business they ended up doing like a special dividend with of the u.s business levering up after the ipo which people viewed as kind of like a bailout to the european side they eventually spun that out there was some compensation things that probably weren't too um you know kind of kosher to say to put it that way right and so we we people had a bad perception and even the the guys from charter were like look if their experiment works then you know it'll be good for the entire cable business their experiment doesn't work and they blow up and we go we can buy

them and i think that people laughed and a lot of people have a lot of respect for charter and their management team and the kind of john malone uh umbrella of people um but people kind of you know they they didn't take them that seriously it was levered at once they combined subtle link and cable vision they levered that business at seven times they had to issue some debt i'm talking about i think it might have been approaching double digits or at least very very high single digits in terms of the subordinated part of the capital structure so there was a lot not to necessarily like about the business let's fast forward to 2020 right they get you know basically fully spin off altice usa get rid of those kind of management fees that they have the european

business they actually proved that they could raise margins without jeopardizing their service we look to continue to grow customers they actually mentioned earlier in the tri-state area and in new york they compete a lot with ryzen files which is completely fiber based it's a a head-on competition they were able to defend themselves pretty well and in boost um the minimum speeds to be higher than verizon files so they actually invested more fiber in their plant they were able to increase price in in the broadband business because they improved the service and improved the speeds the video business as in terms of the pay tv universe um is not it's in secular decline but as it they declined in video customers the video business

wasn't really extremely profitable for them anyway so if a video if a customer drops the video business keeps broadband but pays a little bit more can actually be even better for the free cash flow um so it just became a much better business much more much more well run the multiple came out came down drastically and they got a little you know they they had private equity partners when they acquired these assets as well and those began to sell and they basically all cashed out the the the altice uh business in in europe sold all their shares became a much cleaner um shareholder base cleaner structure they proved that they are very very competitive a very very strong business they delevered so talking about it was levered at over seven times ebitda

he basically took down that below five and then they you know after they streamlined everything they started repurchasing shares and i saw that you know situation unfold over time as a follower of of the industry and and then this year um basically obviously the market sold sold off incredibly and in the march april range basically trading at a 20 20 plus free cash flow margin uh free cash flow multiple uh yield i'm sorry yield wow that's uh so so that's good what what has happened uh since then is in my mind as as a follower of the cable industry they're at a point where they're the fourth largest player number one is comcast it's very difficult for comcast to do deals number two is charter and and they've acquired a lot of cable business and they

have an exceptional management team number three is cox which is is privately owned and uh by a family and basically what's been reported is that they're really not interesting in selling so they're at a point where you know balance sheet's cleaner uh they're they're operating efficiencies and and they're competitive wise are doing very well so in my mind you know the stock fell out this year the broadband business overperformed so what's next right so i thought they would probably either make deals acquire other smaller cable businesses many are private um or they would repurchase a lot of shares and the management team is actually going back actually give them a lot of credit they're actually very shareholder focused so they were able to prove the

the naysayers on on running the operations but the ceo dexter goey and kind of the uh the controlling or quasi controlling shareholder project right are very shareholder minded and and they you know started to repurchase a lot of their stock their own stock this year um and if we we fast forward a little bit after we kind of get away from the the lows of the market in the global crisis they tried to partner they tried to acquire a business called atlantic broadband that's owned by a cable communications business in canada and it was a little bit of a complicated deal it was unsolicited the canadian canadian business is owned by by a family in kind of like has voting control they try to partner with with rogers communication to buy the entire u.s and

cable and canadian assets but just take the the u.s business and give the rest the canadian business to rogers they raise their bid they try to negotiate but no dice so after that um it was very clear that the canadian family did not want to deal with with altice usa or rogers at that point it became even more interesting stuff because in my mind if they can't do this this deal um they have a lot of cash flow that they're producing and a lot of balance sheet capacity to repurchase shares or do acquisitions so the only thing that they could do in my mind was was repurchase shares so basically shortly after they decided to not you know they weren't basically allowed to bid uh for atlantic broadband they they announced a tender a tender offer

to repurchase a you know huge amount uh in the teens of their own shares 2.5 billion dollars of stock that's going to close the tender offer is going to close a little later this month um and they've repurchased a bunch of shares this year and and now it's a little bit um I know I'm going on a lot of the story, but at the moment, post the tender, it's actually a little messy because they sold a smaller commercial fiber business that they had. They sold 49.99% to be exact of a commercial fiber business to Morgan Stanley Infrastructure Partners. And they're going to receive net of tax proceeds, $1.1 billion. So you have to adjust the divestiture and the cash you're coming in. And then you have to adjust the amount that they're going to repurchase through the tender.

and basically you got a 17 billion dollar pro forma market cap business um that's in the last 12 months pro forma generated 1.7 billion in free cash flow and they're going to be able to deliver extremely fast because they levered up a little bit to to do the tender and the buyback And at this point, still trading at a 10% free cash flow yield, very resilient business, recurring free cash flow driven by the broadband business, and doing well because of COVID and in this work-from-home world, you can have a bad broadband connection in your house or apartment. so the trends are very very favorable to them competitively they've been great the free cash flow is very high um and as you de-lever you're going to create a lot of equity value going forward post that that tender so i know that was a a mouthful on on the trajectory of altice usa but that's uh some of the reasons why i think the it's an interesting interesting

thing here no that makes sense that was a great overview ryan you have any questions or thorough thesis and i mean the more you talked about it the more i thought like yeah the need for high speed internet i mean it's higher now than it maybe ever has been and it's not going away right yeah exactly i that's why look if you want to compete with with these guys um and something like for example charter ceo tom rutledge has said we're going to keep improving the broadband business we're going to keep raising speed we're going to continue to make the service better so if you want to compete with us you have to overbuild us so you have to dig up you know the streets or attach cables to the poles and you have to knock on everyone's door to see if they

want to buy your service um you're gonna have to you know so acquiring the customers it's very expensive in addition so it's a business that if you actually if you treat it right right so if you maintain the business pretty well continue to improve the service raise speeds um it's just really hard for anybody else to come in and you know famously um about five or six years ago when you would listen to the quarterly uh conference calls for the cable businesses in you in the u.s the biggest risk was something called google fiber i don't know if you've heard of it um and google fiber they wanted their their vision was that you know digging up streets attaching poles and putting fiber-based very high speed internet and disrupting the cable business

well they quickly figured out that the the cap x that was going to be required and the the marketing spend and the customer acquisition costs on top of that was just going to make the the economics extremely horrible and you had basically a cfo of google coming in that's much more disciplined than hey like you know when they divide when they created the alphabet structure and they separated the different businesses and the other bets on one side and the search and youtube of the other and some of the other businesses they basically took a look and said like there's no way we're gonna we're really gonna do a national u.s national fiber service because it's it's way too hard it's gonna be return on equity on that or assets it's just gonna be

horrible because something that's kind of funny is that when they announced hey we're going to x county and x state and we're going to build google fiber the cable business in that in that area automatically increase speeds without raising prices which makes it even harder right for the for a new player to come in so run right and and and operated well it's it's it's very difficult business to kind of disrupt um it's it's a look it's kind of what reminds me what warren buffett says about the energy business the energy business for him is it's not necessarily even better than the energy business by the way but he likes to say that the energy business for berkshire is not that one that will necessarily make them super rich but it'll keep them rich

yeah um because it's really hard to come in and disrupt you know basically an energy provider that runs so efficiently and provide the good service to customers because the capital required um the cable business is like that but it's it's so essential and the consumption keeps going up that people are willing to pay pay more for it in in terms of the monthly prices yeah i mean if Google is thinking there's going to be too much CapEx. That shows that even a well-capitalized player that's doing, what, like $25 billion in free cash for a year doesn't think it's worth it.

So, I mean, that's pretty good. All right, anything else, Brian? I think that's it for the first half. We're going to hit a quick ad break here, and then on the second half, we'll try to poke some holes in Francisco's thesis. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices.

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Included with Cox Panoramic Wi-Fi. Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. all right welcome back in the next next up we have devil's advocate so for anyone that doesn't know this is sort of our uh poking holes we're trying to make sure the thesis is bulletproof if you will and so we're going to provide some counterpoints and let francisco try to refute them my first one um when i started sort of digging in for some negatives on the business a lot of people mentioned that their strategy could potentially tarnish their business. And I know you already

sort of mentioned this, but Todd Wenning, I think was the one who wrote a piece on mortgaging your moat, which is like you're sacrificing your long-term customer relationships for short-term profits. Is there any concern for you that that's what's going on here with Altice? No, it's not. And you can see it because they've actually accelerated the amount of customers that they're adding during COVID. So you can basically see that it's a service that's in high demand and adding value. I think an aspect that people have complained about

as well with LTE's USA is that it doesn't grow as fast in terms of the number of customers versus a charter or a Comcast because those are basically super regional, almost national companies. So they're everywhere and there are many states

to have basically inexistent competition and altis like i mentioned earlier goes head to head with files um so that makes the growth uh tougher but it also has you know you basically have to be in your toes and compete every day and if you google um not google but if you go to altis usa's website and you look at the pricing the packaging and that's available to customers in the new york New York area, and you compare that with the offers that Verizon Files has, Altice's offers have higher speeds and it's cheaper. So they've continued to invest in the business, make it better and compete with a player that was actually doing some harm to Cablevision before Altice actually acquired them. So I'm actually pretty confident that they're basically willing to

compete and invest in the business to not get too complacent right um and you know mortgage your mode and just raise prices without increasing the quality of the service um they've they've added a a lot a lot of the cable companies in the u.s have added a wireless business that basically it's um an mbno so they basically license um a operator's uh wireless business and sell and wholesale it and sell it to the customers and bundle it with broadband and they've you know done some incredible offers 20 bucks a month or for wireless and and they use the t-mobile and and sprints network which is a network that's investing a lot in the high quality so they're willing to compete and you know offer very attractive products and wireless and that

business is still so small still growing it's only i think it's under 200 000 customers uh maybe in a hundred thousand range and so they're willing to invest in some business that's still losing money as for the company but it's it's one that it's adding value to the customers and one that has a lot of potential so i i don't think they're complacent i think they want to continue to to see opportunities and they find um businesses that are they're smaller they can add and continue to improve they'll do that as well so uh i'm not i'm not too concerned about that so you as i say you mentioned that their ebitda margins are i think it was the ebitda margins are much higher than the traditional business um how did they get there was there

cost then than the traditional industry or the industry yeah traditional industry i think it was just historically but maybe so well there's two parts there and and historically the the margins were were a lot lower and part of the reason why is that there were cable vision in particular had a lot of let's call it unnecessary corporate overhead um a lot of executives with huge salaries it was family controlled big sprawling headquarters so they basically run it ran it um in a way where more entrepreneurial to to be to be clear and what they did was let's let's not invest in in areas that it's just waste and and let's invest in areas that will provide value to our customers so they actually increased the the their

investment in their plant in terms of uh investing in fiber right so given that their their tri-state area cable business competes pretty head-on with with bios um that's fiber-based which is superior to the to the cable plant they're they're actually upgrading their network uh to to fiber so there was a lot of waste in the business to to answer shortly but the cable industry overall their margins have been naturally going up so they participated in taking some ways but they participated as well in the industry uh the industry doing well in terms of margins and why is that happening the reason why that's happening is that the pay tv uh universe uh the the bundle was a much bigger portion of profitability but that's that's a much lower

margin business because you sell the monthly pay tv uh cost to the customers right but you got to pay espn you got to pay nbc you got to pay etc etc fox um and those are variable costs on a per customer basis very very high and those prices are increasing every year so espn um and sports space channels are seeing their costs in the leagues go up so they pass their costs to the cable companies the payable company pass the cost to to the customers and that's created you know obviously and for other reasons in the next netflix effect etc but those are facing headwinds and so there's been those customers are declining they're just saying look we're going to pass that you know if esp wants to raise our price we'll just raise it to the customer the customer wants to leave

but stick with us in broadband that that's going to be a much higher margin customer so the business the revenue mix has been shifting to broadband and the margins of broadband are much higher and the pricing of broadband is going up and that's creating the entire industries even the margin to go up and the capital intensity of the entire industry is going down because a big portion of the cable business capital expenditures are actually set top boxes for the customers the customer premise equipment what they're calling their financial statements and when you don't subscribe to the pay tv bundle right you don't need that big box that it's actually it costs you know if it costs i don't know what it costs these days i think the price has been going out for the

cable business um but let's say it costs 100 bucks it's 100 bucks for a customer multiply that for by millions of customers um it's a lot of money over time so if you're the cable business becoming more broadband based and that's making the cable business more capital efficient at the same time and they're also you know on top of that um some cable business are saying like look we'll sell you a paid tv and don't use our set-top box we'll give you an apple tv and you know you pay for it and you get the app or a cable you know the charger app for as an example and you watch your your channels virtually or you get a roku device um so the entire cable industry is becoming way more capital efficient um with higher margins you know t saw an opportunity of a business with a lot

of fat in his cost structure, took that fat out, but also invested in fiber and at the same time benefited from all these industry trends. So it's not a situation where they just cut costs like crazy that hurt the business. Okay. And then I guess one other part that people probably look at, the debt kind of jumps out of you when you first look at this business. A lot of people might think that the debt load would hamper returns over the long run. Correct me if I'm wrong on these numbers, but they have around $25 billion in long-term debt and they generate, like you said, what, in between $1.5 and $2 billion in free cash flow annually. That may, you know, even if they are generating that cash flow, they're still going

to have to pay down this debt um can you maybe explain a little bit what their debt structure is when they're going to have to pay back this stuff you know so yeah so they are definitely more levered uh more highly levered than their their cable industry peers especially after um executing this tender offer for two and a half billion dollars so pro for our numbers are in the same ballpark so pro forma for the tender offer and pro forma um for the recent uh sale of the commercial fiber business they have a little bit over 26 billion in debt and they in ltm this is a business that's growing right so it's probably better to look at it in the next 12 months basis but to be conservative let's let's look at the last 12 months it's it's probably around a little

over 1.7 billion dollars in free cash flow interest expense pro forma on a cash basis should be under 1.2 1.2 billion um and capex is around 1.1 and ebitda is a little bit over four so you got a little bit over four and ebitda um a little bit over 1.1 in in capex and around 1.2 2 billion in interest expense so it is aggressive but when you think about the type of business that they have recurring revenue business customers that are paying you a monthly monthly bill and and your customer base is actually stronger during COVID and growing and they want to and they're upgrading speeds so in the in the last quarterly call I think the the broadband revenue was growing in in the double digits and a big portion of that was

price increases but not the price increases of a hey just lamp higher prices at customers because many were just upgrading to higher and higher speeds um so you you do have a a high large amount of debt uh even uh debt to EBITDA basis is over six times a charter communications and this is six times pro forma a charter communications um is four to four and a half comcast is a little bit more conservative and they're um they're taking their leverage down under three times over time and probably closer to two times so it is more aggressive um and that's why i think it probably has the high free cash flow yield but given that they're returning so much capital to to shareholders i think that makes it attractive and it makes the risk reward

risk reward interesting and and even you know it's gotten a nice bump since the since they they accelerated their buyback um starting in october and then they announced a tender um late late last month so it's had a nice run-up but if you if you eliminate that run-up we're talking about a pretty high free cash flow yield and what they decided to do was look let's let's just take down our equity by by nearly 20 right so in a very very short period of time we're talking about we're talking about months uh so high high teens in terms of the buyback in in two or three months because they see the opportunity generating so much free cash flow they're they're seeing how business is doing they don't have acquisition opportunities ahead um so they think it's

it's a worthwhile use of capital they've been refinancing debt lowering their their their pricing and and the debt is is pushed out and they're continuing to push out they don't have like a huge uh maturity maturity that's coming up that that would harm in or any way and um free cash flow and revolver are there to provide a lot of liquidity in case you know you get another freeze up in the credit markets but they don't have a situation where they have a lot of maturities coming and they're been actually refinancing a lot this year uh to lower interest expense so so you're it's basically like a public lbo a leveraged buyout of a public company with very very attractive free cash flow with a good path going forward so it's not there are a lot of

investors that would look at the balance sheet and would say look this is not necessarily for me um because they they would say it's not the most conservative thing in the world and they're probably right charter has charter has a much uh some people even say that charter balance sheet's aggressive but charter has much lower uh leverage than they do um but it's it's a very strong business very recurring in uh revenue in nature and what they've done is just take down shrink their equity um and i think that's going to prove worthwhile because going forward what they're going to do over the next 18 months is just generate the free cash flow pile up the cash in the balance sheet and as you naturally de-lever and the multiple of enterprise

value uh to ebitda to remain stable you just you create a lot of equity value so i think it's it'll be worthwhile but i would agree there's just a lot of investors who who would say this is not for me and maybe that's why the the opportunity is here it's what would have to happen for you to sell it if you you know what would the flip side of your thesis if you will uh i think two two main things like you know business-wise and valuation-wise uh right now pro forma for this tender and i'm and i'm assuming very aggressive uh that they're the way the tender works is that they they have offer a range of price of what they would acquire the stock at the stock is in the third high 34 dollar range and they would buy back stock even at 36 right so in my assumptions i assume they

just buy all that stock at 36 which is not necessarily the case but basically even with those assumptions is trading at 10 10 free cash flow i think if it goes to something like five percent free cash flow yield then look i mean the leverage and everything else then it's not worth having a five percent free cash flow yield for this stock so on a valuation basis yes if it has a huge run-up in a very very short period of time um then it's probably worthwhile to sell i don't think it's going to get to the free cash flow yield of five percent anytime soon i think this business is just going to generate cash flow delever and and and eventually um that yield prove worthwhile to shareholders on the flip side what's in the operations i think what's

more interesting what what would have to happen in the operations for me to say look um this is probably a sell and mainly I think if they have issues with the broadband business in terms of competition with Fios I think they've been competing very very well against Fios but if Fios all of a sudden decides to like hey we're just gonna lower prices raise speeds and go to war with you then that's a difficult situation I don't think it's I don't think Verizon is in a positioned to do that they are a business that is very highly dependent on paying a high dividend yield to shareholders um and that's their focus in generating keeping margins high and generating free cash flow and they don't have a need uh to do that i think if you all of a sudden see that

you know they get complacent with how they invest in the broadband business and the cable plant if they never you know if they don't keep raising speeds annually if they don't keep offering um better service to customers so one of the things that they're behind versus charter is that charter during the pandemic they were at one point able to to do self install for customers for like 90 percent of customers something very high it was a very short period of time that they did this so the the cable guy didn't have to go to your house or apartment they mailed you the stuff send you instructions or talk to you by phone and you self-install altice is very is behind in that but they said that next year they're going to be you know they're going to be able to do a huge

portion of self-install if you see that they committed to that you know quarterly earnings if you see that they're really not doing that um if you see that you know they said they're invest more in fiber they if you see that they're not doing the the making the fiber investment if you you kind of see cracks in what management's telling you that they're gonna do but they don't do it or don't execute that's when you you kind of get some signs that they're not operating the business at at a at a high level at a level that you wouldn't want to see them operating it so you got to look for those cues um in terms of the operations and i think that's more interesting to because for me i would rather just the stock stay at the current price i'm going to buy back a huge

percentage free cash flow yields high they're going to deliver it's going to create a lot of value um over time so i'm not really worried about the valuation per se can it go to the 15 free cash flow yield yes it'll just make it more attractive but if you see signs that they're complacent with their business um then that's more worrisome um charter basically went bankrupt during the financial crisis because they were highly levered but they didn't invest in the business uh the speeds were very very low um and they were just the customer um service was horrible customer service was horrible and and when the new team came involved they actually had to raise capital expenditure through the roof to get the the cable plant uh where it should be so

you just don't want them to be complacent and the targets that they have in mind that the investments in in the with the customers that they have and that they're competing very strongly continuing to add customers um and continuing to see customer usage go up so they cite you know how how many uh gigabits each customer is using and you want to see that you want to see the customer viewing the business as more and more important over time and not necessarily have a battle with the business so it's not one number that you're looking at but you're looking at all these things together okay and then to wrap things up with the last question i know you mentioned a few things that they are changing um is there anything that they're doing right now that you

would like to see them do differently um i you know something i mentioned earlier just getting more aggressive in terms of the self-install i think they could be a little bit more aggressive on the pay tv side the pay tv uh side is a little bit more bloated for them because they're in new york right so there's a lot of regional sports networks there so the the cost of the pay tv is just much higher they could be more aggressive they could say like look we're not going to invest that much in set-top box we're just going to send roku's to customers that want them and you can stream the channel um if if discovery channel for example has a renewal agreement with altice altice should be aggressive like look we're not

gonna rate we're not gonna accept um a higher rate because customers aren't watching your channels so i think being a little bit more aggressive and efficiencies and negotiations on the pay tv side would be nice to see might not matter as much at the end of the day because that side of the business is a secular decline and as you drop that off margins go up anyways it'll be also interesting to see um how the wireless business uh performs for them there it's it's an investment so they're they're losing money on acquiring customers but they're basically leasing the t-mobile network and and t-mobile is doing a lot of interesting things maybe they should partner with t-mobile so what how that wireless side of the business evolves will be interesting even

though it's not material today um so those are some of the things i'm i'm looking at um how can they just continually make the business better for the customers um so i think on the pay tv side and the wireless side are very interesting because i'm confident of what they're doing in the broadband business they're being aggressive and and raising speeds um and adding a better broadband product to customers but they could uh do do some interesting things on the pay tv and the wireless side would you want to see them sell the pay tv side like if they got an offer for it it sounds like you're really optimistic about the broadband side but not so much on that pay tv it's really hard to to break that apart and sell it it's um it's part of the same infrastructure

okay so if you let's put it this way if you basically shut down the pay tv business it creates more capacity in the network to offer higher speeds so it's not like an isolated business in that sense it's not like a direct tv it's not like them offering broadband and then a dish in your house so and so it's not it's very very much part of of the cable plant so think about a direct tv when it rains the signal gets bad if it rains you know as long as there's power there's power and there's no nothing that falls in the cable wire itself um you're still going to have the signal for pay tv so it would be very difficult to sell that the pay tv side of it it's better to just run it for for whatever profit you can get out of it and if it goes down it just

goes down and your broadband margins your overall margins will get higher and if you can find more efficiencies and customer return goes down and even better so many of the smaller cable businesses there's another one called cable one that's public the ticker is cabo they've just basically said like look screw it we're not you know we're leaving the pay tv business for dead it's it's going to be all about broadband and they have the highest margins in the industry so because they just and the highest multiple it trades into some people would would argue why the multiple is so high but um it uh it's it's not going to be it's not the it's not the end of the world if they continue to have the pay tv business they can make it better and reduce churn versus uh

okay i think that's all the questions brett and i have where can uh listeners find you if they want uh to see more follow me on on twitter um at franco olivera and so happy to talk investing with with anybody hope you all enjoyed the episode yeah i think we've got a great great overview of i mean altice but just the cable business in general like that's something i didn't really dug into much and i think that people will you know they'll like it definitely awesome great all right well uh we want to remind our listeners that we are not financial advisors Anything we say or discuss here on chitchat money is not formal advice or recommendation. Thank you guys for listening. We'll see you next time.