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(Bloomberg) -- The best description of Patrick Drahi’s business model may be the one he gave last year in a talk at his alma mater. “I bought everything on credit,” he told students at French engineering school Polytechnique. “I didn’t take much risk. It’s the banks that lent everything.”

Indeed. In a frenzy of deals over the past four years, Drahi transformed a modest cable TV and phone group, Altice NV, into one of the world’s biggest media and telecoms companies. In the process, Altice ran up some $55 billion of debt, making it Europe’s largest junk-rated borrower.

Now the deal machine has seized up, and all that credit is spooking his backers. Altice shares plunged 53 percent since Nov. 2, when the company tightened a forecast for earnings growth and reported lower-than-expected revenue. Investors are now demanding that Drahi, the biggest shareholder in Altice, demonstrate a new skill: operating his far-flung empire. 

“There’s a crisis of confidence,” said Henry Craik-White, a portfolio manager at ECM Asset Management, a London-based unit of Wells Fargo & Co. that holds Altice bonds and loans. “It’s fine to have leverage on stable assets, but if the assets turn out to be less robust, that changes the entire equation.”

Addressing investors at a conference in Barcelona on Nov. 15, Drahi and other Altice executives said they would put acquisitions on hold, focus on management, and consider asset sales to reduce debt. Drahi, who saw more than half of his $12 billion net worth erased almost overnight, installed trusted lieutenants in key posts and pledged to take a more hands-on role.

‘Irrational Period’

“We are ready, perfectly equipped, and more determined than ever in this irrational period,” he wrote in a mid-November message to employees of French mobile and broadband group SFR, Altice’s largest asset. Since its purchase by Altice for around $20 billion during 2014 and 2015, SFR has lost around a tenth of its customers amid complaints of poor service.

An Altice official declined to comment for this article.

Drahi has some breathing room. Most of the debt doesn’t mature until 2022 or later, and 85 percent is at fixed rates. But yields on Altice’s junk bonds have climbed and the cost of insuring the company’s debt for five years has jumped to the highest since early 2016. Moody’s Investors Service followed S&P Global Ratings this week in lowering its outlook on some of Drahi’s companies to negative. Adding to the unease, Drahi and his inner circle haven’t yet demonstrated they can effectively manage the empire they built, or command good prices for assets they’re planning to sell. 

There’s at least one group of winners in the Altice saga: investment banks. Over the past four years Altice has paid them more than $1 billion in fees on acquisitions, syndicated loans, and equity and bond underwriting, according to estimates by Freeman Consulting Services based on data supplied by Bloomberg. With Drahi now embarking on asset disposals, the bankers look set to make more.

Read here for more on the difficulties Drahi is facing at Altice

Lenders also appear to be growing concerned about how exposed they are to Altice’s debt pile. Since shareholders hit the panic button last month, fund managers have been receiving calls from a few of the company’s major lenders with offers to sell Altice debt securities, according to people familiar with the matter, who asked not to be identified as the discussions were private.

During its takeover spree, Altice bulked up in France with SFR, acquired Cablevision Systems Corp. and Suddenlink Communications to create the fourth-largest U.S. cable operator, and bought assets from Israel to Portugal to the Dominican Republic. Investors piled in, doubling Altice’s share price between late 2015 and this June. An initial public offering of its U.S. unit raised $1.9 billion earlier this year. As recently as August, Altice was eyeing a possible bid for Charter Communications Inc., an acquisition that would have topped $100 billion, people familiar with the matter said at the time.

“Patrick Drahi was a visionary in cable, but he developed his group through external growth,” said Frederic Ichay, a partner specializing in mergers and acquisitions at the London-based law firm of Pinsent Masons. “He could be reaching the end of his business model.”

Drahi, 54, has fashioned himself as the next John Malone, the 76-year-old U.S. cable and media mogul who studied engineering and worked at Bell Labs before gaining renown as a swashbuckling dealmaker. Drahi got into cable in the early 1990s after earning advanced degrees in optics and electronics and doing a stint in a research lab. “John Malone is my role model,” he told reporters in Paris in 2015. “He’s an engineer who started with nothing and got to where he is today. He’s not afraid to take risks.”

Yet there are striking differences between the two. Malone spent more than a decade as a management consultant and corporate manager, overseeing the turnaround of cable group Tele-Communications Inc. before embarking on a string of debt-fueled acquisitions.

Drahi, by contrast, was making deals from the start. In the early 90s -- around the time TCI spun off Liberty Media Corp., which would become Malone’s core holding -- Drahi used a student loan of 50,000 francs ($9,000) to set up his first cable business in a tiny Provencal town. He began buying and selling small French cable companies, including one to Malone in 1999. By then, Drahi had moved to Switzerland to take advantage of lower income-tax rates. In 2001, he incorporated Altice in Luxembourg as a holding group for his operations.

Inner Circle

Malone tends to entrust his businesses to seasoned managers, while Drahi has often put bankers in charge. Two Morgan Stanley veterans, Paris-based Bernard Mourad and New York-based Dexter Goei, joined Altice after advising the company on deals. Goei is now Altice’s CEO; Mourad ran its media business until last year, when he left to work on Emmanuel Macron’s presidential campaign. The odd man out is Portuguese-born Armando Pereira, who has little formal education but is known as a ferocious cost-cutter. He was a founding partner of Altice and has held top jobs in its European businesses.

Drahi allows few people into his inner circle, but if you win his trust, he will consider you as part of the family, said a banker who has worked with him. He and other bankers interviewed for this article asked not to be identified because their discussions with Altice were private.

Drahi did his first big asset sale last year, when he offloaded SFR’s Belgian unit for 400 million euros ($472 million), about 20 percent less than some observers had predicted. The buyer: Malone’s Liberty Global. Altice launched its latest round of disposals on Dec. 1, when it announced the sale of two Swiss units for $218 million to InfraVia Capital Partners.

Read here for more on Altice’s Swiss Data Center Disposal

A banker who has worked on deals with both companies described Altice as similar to Liberty, but riskier, and said Drahi goes a step further than Malone.

Known for his no-frills style, Drahi maintains a spartan office in Geneva and has negotiated some transactions at Le Copernic, a modest brasserie near the Arc de Triomphe. He refused to bend on terms for hiring banks, making it clear to advisers seeking his business that others would eagerly step in.

The son of two math teachers, Drahi has a talent for financial modeling and can compute information quickly, said a banker who worked on Altice’s 2014 purchase of SFR. While preparing that bid, he contacted nine banks late on a Friday afternoon, telling them he wanted to increase the cash portion of his offer. The move required lenders to cough up an additional $2 billion with few protections if the business stumbled later. But all nine banks promptly said yes, enabling Altice to beat out construction-and-telecoms giant Bouygues SA, the French government’s favorite to acquire SFR from its then-owner Vivendi SA.

Reviving SFR

The victory showcased Drahi’s agility, but also his sometimes strained relations with the French establishment. Born in Morocco, he moved to France as a teenager and excelled at its best schools, but has been slow to develop the connections in government that French corporate leaders often have. He added to the tension by living in Switzerland and domiciling Altice abroad, first in Luxembourg and then the Netherlands. “Mr. Drahi needs to bring all his holdings back to Paris,” then-Economy Minister Arnaud Montebourg said in 2014. Drahi made no such move.

About a month before the stock slide began, the billionaire paid a visit to a top adviser of Macron, looking for ways to ease the challenges of the French phone market. The topics included the need for mergers in the industry and the future of SFR, people familiar with the matter said. He came away with no solutions.

His most-urgent problem now is the French business. When Altice took over, SFR was considered the main competitor to market leader Orange SA and had nearly 23 million mobile and fixed subscribers. Since then, revenue and profits have slumped as more than 2.2 million customers fled to rivals like Orange, Iliad SA’s Free and Bouygues.

Investment Needed

SFR was already in trouble when Drahi bought it, because Vivendi hadn’t invested sufficiently in its networks. But Altice moved slowly to raise infrastructure investment, and imposed draconian cost cuts, announcing plans to shrink SFR’s workforce by a third and enraging suppliers by delaying payments. Drahi hoped to boost profits by enticing subscribers with premium media content and sports-broadcast rights that he had acquired. Instead, clients howled about deteriorating service. SFR accounted for 56 percent of all complaints last year to the French Association of Telecommunications Users.

SFR also suffered management turmoil as its chief, Michel Paulin, quit in September 2017, and Altice CEO Michel Combes resigned in November and was replaced by Goei. Combes, the former Alcatel-Lucent SA chief who had overseen the sale of the struggling telecoms-equipment maker to Nokia, had been expected to help turn around SFR.

The new boss at SFR is Alain Weill, a longtime radio and television executive who has little telecoms experience, while its chief operating officer is Pereira, Drahi’s cost-cutting czar.

“SFR can still recover,” said Frederic Retourney, a national leader of the CGT union that represents SFR workers. “But it is difficult to imagine a turnaround without investing in networks, stores, and staff.”

U.S. IPO

Altice’s U.S. operations offer some cushion against the turbulence in France. Suddenlink and Cablevision, now called Optimum, are likely to deliver nearly half of Altice’s global cash flow this year, analysts at HSBC Holdings Plc said in a note on Nov. 20. A key problem for Altice: its U.S. cable units are too small to have negotiating clout with programmers. The IPO was supposed to address that problem by allowing the company to use stock for potential acquisitions. But since June, Altice USA shares have declined by almost half.

As Drahi tries to rebuild confidence, his remarks about buying everything on credit could come back to haunt him. “What is my risk if in four or five years I can’t reimburse my debt? No big deal, the bank will repossess the house,” he told Polytechnique students, using the analogy of a home mortgage. “The money isn’t important. What’s important is that the bank can never take away the five years of happiness that I’ve had.”

Investors who’ve seen their holdings in Altice crumble in the last few weeks might not share the same sense of happiness.

--With assistance from Fabio Benedetti-Valentini Gerry Smith Luca Casiraghi Dinesh Nair Alastair Marsh and Cecile Gutscher

To contact the reporters on this story: Carol Matlack in Paris at cmatlack@bloomberg.net, Alexandre Boksenbaum-Granier in Paris at aboksenbaumg@bloomberg.net, Manuel Baigorri in London at mbaigorri@bloomberg.net.

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net, Rebecca Penty at rpenty@bloomberg.net, Frank Connelly

©2017 Bloomberg L.P.

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