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Altice - Short

Sohn Conference, Tel Aviv


October 2015

Disclaimer
The following presentation represents IONs analysis and opinions, and
is based on publicly available market information and regulatory filings
by Altice. This is not an offer to buy or sell securities of Altice, nor
should it be taken as advice on whether to purchase or sell securities of
Altice. ION may have positions, short or long, in the companies
discussed in this presentation. For further information, we encourage
readers to review Altices publicly available filings.

Boom and bust cycles history repeats itself


Potash price per tonne, $
1000
800
600

400
200
0

Africa-Israel share price,


600
500
400
300
200
100
0

Source: Bloomberg

History is replete with the remains of once high-flying industries and overleveraged companies
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Altice overview
- Altice is a Pay-TV/mobile operator in Europe, Israel, and most recently the
US with net debt/EBITDA of 5.7x
500
% change

400
300

Drahi sells
550mn in
IPO

Drahi sells
290mn

Creation of dual
class structure to
fund M&A while
protecting
majority control

200

100
0
Source: Bloomberg

Altice

STOXX Europe 600 Telecommunications

Altice created 15bn worth of equity value in 21 months


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Telco M&A frenzy


Altice has overpaid for its acquisitions
EV/EBITDA multiple

16.0x

14.0x

14.0x

12.0x

10.1x

10.0x
8.0x
6.0x

5.9x

7.0x

6.9x

SFR ('14)

Portugal
Telecom
('14)

10.0x

4.0x
Sector 5 yr
historical
average

Suddenlink Bouygues Cablevision


('15)
('15)*
('15)

Source: Bloomberg;
Altice and Vivendi
filings
*offer rejected

The sectors current EV/EBITDA multiple is 6.8x, up from 5.6x 5 years ago
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Industry headwinds threaten traditional Pay-TV


- 7.3% of US households have broadband but
no pay-TV subscription, up from 4.2% in 2010
- Rise of alternative OTT players

- Broadband connection has become


commoditized aka dumb pipe

Altice valuations have soared as sector headwinds have accelerated


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Implausible EBITDA margins


- Altice claims that it has increased margins across its holdings

Source: Altice Cablevision presentation

We question whether HOTs real EBITDA margin has improved by 900bp


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Israel: HOTs Hebrew disclosure reveals EBITDA margin 500bp


below Altices reported number

Source: HOT 2Q15 financial statements

Only 1/3 of the difference is explained by a management fee paid to Altice


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Israel: We question HOTs aggressive accounting


% of content costs shifted from P&L to
Balance Sheet
12%
10%

Altice
acquired
majority
ownership

8%
6%

10%

6%

5%

2012

2013

4%
2%

1%

0%

0%
2010

2011

2014

Source:
HOT financial statements

Increasing capitalized expenses to inflate ebitda margins


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Israel: Adjusted margins paint a different picture


50%
48%

46%

48%

44%
42%

43%

40%

41%

38%
36%
Altice reported
margin for HOT
2Q15

HOT reported
margin 2Q15

Adjusted HOT
margin 2Q15

Source:
Altice 2Q15 financial statements;
HOT 2Q15 financial statement;
ION research based on Hot public
filings

When adjusted for capitalized content costs, margin improvement is negligible


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Israel: Cost-cutting went too deep


Israel Pay-TV subscribers
700
Subscribers, k

600
500
400

HOT (-6% CAGR)

300

Yes (+2% CAGR)

200
100
0
2011

2012

2013

2014

Source: HOT financial statements;


Yes financial statements

Analysts assign rich valuations to HOT (average 8.6x 2016 EBITDA) while
incumbent Yes/Bezeq trades on 7.3x and is experiencing stronger commercial
success
Source: Bloomberg
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Cablevision: Does this deal mark the top?


- Altice is paying a historically high multiple of 10x EBITDA for Cablevision

Yield on 2022 Cablevision


bond

- Unsecured bonds raised for the Cablevision deal were sold at over 10%
yield, reflecting doubts around the companys ability to service its debt
12%
10%

10%

New average cost of


debt: 7.5%
Leverage level: 7.4x
pre synergies

8%
6%

6%

4%
2%
Day before Altice
acquisition

Current
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Source: Bloomberg

Cablevision: Cost-cutting targets are unrealistic


6
5

$, bn

4
Non-content costs

Non-content costs

Implied 33% reduction in


other operating costs

2
1
Source: Cablevision 2014 10k;
ION research

Content costs

Content costs

Increasing 7.5% per


annum

2014

2018e

Management has articulated longer term cost reduction targets to the equity market
which far exceed $450 million in savings promised to bondholders. Moody's views this
more aggressive target as a longer term, aspirational goal Moodys, September 24, 2015
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Cablevision: Were skeptical of margin targets

EBITDA %

Cablevision margin unlikely to reach Altice


target
50%
45%
40%
35%
30%
25%

48%

32%
Cablevision

35%
US Cable average

Altice target for


Cablevision

Source: Altice Cablevision


presentation

Cablevision synergy targets of $900m appear lofty especially considering


fiber competition, lack of mobile offering, and rising content costs
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Wall Street overlooks the issues


- Our 12-month ROIC-based price target of 41/shr incorporates a premium above our 30/shr valuation
to capture Altices M&A potential Goldman Sachs note on Altice, Sept 8, 2015
- Given that the NAV is clearly growing, we place a 25% premium to NAV in determining our
38.00/share equity valuation. RBC Capital note on Altice, Sept 18, 2015
- Adding 3.5bn for a 50% probability of a revived Bouygues deal and a further 4.7bn from additional
M&A (based on our PE model) leading to a post-M&A Dec-16 TP of 28. JPMorgan note on Altice,
Sept 1, 2015
- Citi adds 2.5 of value for unknown future deals to Altices price target in a Sum of the Parts

Lucrative Wall Street fees ($200m for Cablevision alone) coincide


with many sell-side analysts assigning lofty multiples and adding
value for unknown future deals
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10 questions for Altice management


1.

How do you explain fully the discrepancy between HOTs reported 2Q15 43% EBITDA margin and your reported HOT
margin of 48%?

2.

Why has HOT been aggressively growing capitalized content costs while reducing expensed content costs?

3.

Has Numericable shifted content costs from the P&L to the Balance Sheet?

4.

When do you expect to reverse subscriber losses in Israel and France?

5.

How much are content costs expected to rise at Cablevision over the next 3 years?

6.

How can Cablevision without a mobile offering effectively compete against Verizon triple play?

7.

Can you explain the difference in Cablevision cost-cutting guidance between equity holders and bond holders?

8.

Why do you think that you can generate EBITDA margins in the US that far exceed those of any other US operator,
including those with greater scale?

9.

Why did you create a dual class structure despite the Expert Corporate Governance Service advising against it?

10.

Your aggressive cost-cutting efforts in Israel resulted in a large number of customer losses due to poor service and
youve had to invest in restoring customer service levels (Altice 3Q14, 1Q15 earnings releases) . Why do you believe
that this creates long-term shareholder value?

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Summary
History is replete with sectors whose valuations reached
disproportionate levels and then crashed. Every boom and bust cycle
has a poster boy. In this cycle, its Altice
- We believe that Altices operating track record is far less impressive
than were led to believe
- We question managements ability to retain subscribers and
whether theyve utilized aggressive accounting to inflate EBITDA
margins
- In our view, Altice has overpaid for Pay-TV acquisitions against the
rising tide of OTT alternatives and cord cutting
- On realistic multiples, we believe shares are worth ~50% below the
current price
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