Even those who have never heard of the stand-up comedian Henny Youngman probably have heard his most famous line: “Take my wife…please.”
Youngman, who worked practically up to his death at age 92 in 1998, had another line that he offered as advice to his fellow performers: “Take the money.”
In the uncertain world of show business, his admonition was simply that as the seller of a service, don’t be a fool. If someone is offering to buy your services, or if you can persuade them to buy your services, grab the dough.
The recently announced acquisition of Cablevision (CVC ) by the French media giant Altice (ATC:EN) for $17.7 billion reminds me of Youngman’s advice. The Dolan family, who control Cablevision, a New York-area cable operator and owner of the Newsday newspaper, are grabbing the money from Altice. And because the Dolans are far from fools, I think the acquisition signals several important messages for investors.
First, the days of rich profits for cable are ending. That’s not news, of course, but the idea that some brilliant combination of cable/wireless/traditional media will produce synergy or some extra something that keeps profits high is probably a dream. Of course, it’s in the interests of investment bankers to push that dream in order to earn M&A fees and the profits from underwriting new securities to pay for all the acquisitions. And the bankers find ready ears among media moguls and wanna-be moguls who see themselves as masters of a new, bigger media landscape.
But if the Dolans — who’ve amassed billions by wheeling and dealing — are selling, that tells me they see more value in “taking the money” now than in playing the new media game.
Watch the Liabilities
Second, keep an eye on debt. To make its acquisition, Altice borrowed $4.8 billion in the junk bond market. It had to pay 10.875% to get the money. That’s higher than the 9.75% the company thought it would have to pay, and the offering was smaller than the $6.3 billion it hoped to raise. According to The Wall Street Journal, many bond buyers are concerned about the level of Altice’s debt, which will be seven times its earnings before interest, taxes, depreciation and amortization. For its part, Altice says it will lower that debt ratio by cutting costs.
Increased levels of debt make companies more fragile, which makes equity prices more volatile.
1+1 = Trouble
Finally, cost-cutting and synergies largely don’t work. A study by the Harvard Business Review found that 70% to 90% of corporate mergers and acquisitions fail. Of course, that doesn’t stop the acquirers from living in hope. They believe that two can live as cheaply as one, which is the old-fashioned way of saying that getting rid of corporate fat and duplicate costs at the acquired company can make more of its revenue flow to the bottom line of the new, combined entity. Ha!
If you look at how long it took United Airlines to work out its acquisition/merger with Continental, or peek inside the messes after the mergers of less visible companies, you’ll see that things rarely work out as planned. Even if some costs are eliminated, the costs of managing the new behemoth of a company rise.
In the case of Cablevision, since the Dolans aren’t known for their warm and fuzzies, I doubt the company isn’t already running lean and mean. If there were any fat, the Dolans would have already trimmed it.
The Bottom Line
The immediate lesson is that I would stay away from Altice shares as well as shares of most media companies. Dividend heroes including AT&T (T ) and Verizon (VZ ) can afford to go off on new media tangents because they are oligopolies in their core telecom businesses, which are not going away anytime soon.
Also, if you have a choice between being a shareholder of an acquiring company or the company being acquired, the choice is clear: take the money.