Expert Commentary: Cinven makes the right connection

Cinven’s transformation of a handful of French cable assets into a multi-billion-euro national champion is an “epic case study” in working with an entrepreneur and having faith in a contrarian play, says Cinven partner Nicolas Paulmier, who worked on the deal.

It’s also a private equity masterclass in market instincts, timing and clever use of financing, he adds.

“What’s striking for me is the way the business fundamentally changed,” says Cinven senior principal Thomas Railhac. “We started with a business that was valued at just over €500 million. Today, Numericable has an enterprise value of €30 billion on the stock exchange.”

Having organised into sector teams in 2002, Cinven identified the French telecoms industry as the source of potential opportunity. Cable assets seemed a natural fit for private equity investment.

“In France, cable was very patchy,” says Paulmier, explaining that the networks were fragmented and operated by several companies on a concessions basis. “It was a very complex situation, nobody was really making money, and cable had a reputation for losing business.”

In early 2004 a bundle of cable assets came up for sale. France Télécom, which owned the traditional digital subscriber line (DSL) network, had been forced to sell its cable assets given concerns over conflicts of interest. These assets were packaged together with Vivendi-owned Canal+ and French broadcaster TDF’s cable assets.

With rumours of the impending sale prevalent in the market in late 2003, Paulmier was introduced to entrepreneur Patrick Drahi. Drahi, who has a background in telecoms engineering, had already begun acquiring regional cable assets in the east of France, Brussels and Luxembourg. Paulmier convinced him to team up with Cinven to purchase the bundle of France Télécom, Canal+ and TDF’s cable assets.

“He had great experience in cable, and he knew how to simplify cable network operations to increase EBITDA and cashflow so you can then invest in the network to significantly improve its performance,” Paulmier says. “The thesis was to replicate what he had done on a small scale on a bigger scale.”

In February 2005 Cinven made its initial €528 million acquisition to create Numericable, and subsequently combined the France Télécom, Canal+ and TDF assets with Drahi’s cable business Altice One in November.

The investment was based on the vision that ultimately there would be two physical telecoms infrastructures, cable and DSL, and that Numericable would be the only alternative to the DSL network. Eventually cable and DSL would converge as the industry transitioned to fibre, but in the meantime, cable – delivered through a large pipe as opposed to the copper wires used by DSL – would be in a better position to offer high speed internet.

The initial Numericable platform serviced around 45 percent of the French cable market, and Altice One around 10 percent. In June 2006 the group acquired Noos, the cable provider in the Paris area operated by Liberty Global. This meant that Numericable now operated 99 percent of the French cable market.

By bringing these cable assets together and manging them in a more efficient way, Cinven realised a large number of synergies, resulting in a doubling of EBITDA.

“The good thing about cable is you can completely deconstruct the cost base and rebuild it in a different way,” Paulmier says. “As a result we deleveraged, refinanced our debt, and also invested heavily in deploying fibre to be ready for the future and to improve the broadband services we could deliver to our customers.”

In September 2007 Numericable acquired B2B operator Completel. At this point Numericable had become a very large business, with an EBITDA approaching €600 million. It was time to de-risk the investment and realise some of its investment.

In March 2008 Cinven sold a 38 percent stake in Numericable to The Carlyle Group, retaining an equal stake of 38 percent, with the remainder held by Altice. The sale, together with three prior refinancings, gave Cinven a 1.8x return on investment.

“From that point onwards our strategy was to invest in the network to offer very high speed internet services and cross-sell them to the TV customer base,” Railhac says.

However, in the summer of 2008, Lehman Brothers collapsed, throwing the financial world into chaos.

Although Numericable had a fair amount of leverage at that time, the financial crisis also created an opportunity. The market value of the company’s debt reduced and Cinven and the other shareholders bought back a portion of it at a discounted price.

In 2012, when the market had recovered, Numericable went back to the financial markets to raise an inaugural high-yield bond, to refinance the debt and to extend the maturities.

“The company has been issuing bonds ever since,” Railhac says. “We created stability in the capital structure by diversifying the sources of financing.”

Although the financial markets had recovered, in 2012 the French telecoms market was hit by another storm. Free, a French fixed telecommunications operator, launched a mobile offering undercutting the three French mobile players – Orange, Vivendi-owned SFR and Bouygues Telecom – sparking a price war on the mobile market.

Numericable approached SFR to suggest a merger.

“We could agree there were huge synergies, but we could not agree a valuation,” Paulmier says.

It was then that we decided to hold an IPO, which would give Numericable an external valuation. In November 2013 Cinven, Carlyle and Altice floated Numericable on the NYSE Euronext Paris.

“We reopened the French IPO market with the IPO of Numericable,” Railhac says. 

Given investors’ appetite for cable and scarcity of public stock available following multiple takeovers by strategic players, the listing was very successful and 10 times oversubscribed.

Cinven’s stake reduced to 18.3 percent at IPO, and Cinven subsequently sold down its stake in Numericable to Altice partly for cash and partly for shares in Altice.

With Numericable’s valuation no longer up for debate, the group, together with Altice, won the auction to acquire SFR from Vivendi in 2014 – a few months after the IPO of Altice – for €13 billion in cash plus a 20 percent stake in the combined business.

Following a number of sell downs, Cinven sold its last shares in Altice in March 2016. 

Over a hold period of more than 10 years, Cinven generated cash proceeds of €2.2 billion, a capital gain of €1.7 billion representing a return of 4.7x its initial investment and an internal rate of return of 157 percent for investors in The Third Cinven Fund.

“It’s a great entrepreneurial and financial journey, of course, but it was also a great human journey,” Paulmier says. “We had lots of fun, but there were really difficult times sometimes. You know the vision is right, but sometimes there are stormy seas. What made this possible is the mutual trust we developed up front.”

This article is sponsored by Cinven. It first appeared in the June 2016 edition of Private Equity International