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Back at the end of the last century, Patrick Drahi was a fledgling French media entrepreneur, a one-time protege of U.S. cable king John Malone. He was intent on building an empire to rival that of his mentor, who borrowed heavily to build two media conglomerates and today controls significant stakes in Sirius XM and Charter Communications.
Within little more than a decade, Drahi, a graduate of the Polytechnique, France’s MIT, had an empire stretching from Israel, across Europe into the U.S., and down to the Dominican Republic. His holdings included France’s oldest phone company and the country’s 24-hour news channel, a chunk of British Telecom, Portuguese mobile phone and cable operators, and mobile phone and TV news networks in Israel.
In 2015, he moved into the U.S., buying Suddenlink, a southwestern cable company, for $9 billion. He bought New York-area cable and internet provider Cablevision for $17.7 billion from the Dolan family, and paid $200 million for Cheddar, a youth-oriented cable business channel. For fun, Drahi, who has a 750 million-euro collection of modern art, bought auction house Sotheby’s in 2019 for $3.7 billion.
Drahi built his empire buying undervalued and underperforming cable and telecom companies, and applying what he and his aides claimed was telecom engineering — lowering costs with better technology and using the ensuing low prices to win customers. In truth, it wasn’t just telecom engineering, but a large dose of financial engineering that grew Drahi’s empire, most of it under the brand Altice. Drahi and his companies borrowed some $60 billion in bonds and bank loans to pay for it all. But rising interest rates, slower-than-expected growth, the pandemic, and poor management combined to push Drahi and his Altice empire to the brink. Now Drahi is engaged in a fierce battle with creditors, but is nearing the end of his rope, as interest payments rise, revenue is coming up short, and few buyers want to refinance his debt.
At a meeting of creditors last fall in Goldman Sachs’ London office, Drahi said everything he owned would be for sale in an effort to cut debt and keep a smaller Altice conglomerate float. “Everything is open, it’s just a question of offer and demand,” Drahi said, according to a transcript of the meeting reported by Bloomberg. “All in man, all in. Plus the Eiffel Tower, OK?”
House of cards
“The house of cards is tumbling like it has never tumbled before,” investment banker Thomas Coudry told Bloomberg at the time.
But more than a year later, Drahi has yet to sell enough of Altice’s holdings to right the ship. In fact, the outlook is so bad that the share price of Altice’s U.S. operations, which had almost $25 billion in debt at the end of June, has dropped 93% since the company went public in 2017. Net income for the first half of the year was down 92% from a year earlier, meaning there’s not much cash floating around to service that debt.
In the U.S., Altice lost 51,000 broadband subscribers in the last quarter, despite building up its fiber-optic network and vastly reducing the number of trips its repair trucks need to make, and the number of calls to its helplines.
Can’t give it up
Across his empire, which Drahi has largely divided into Altice units in several countries, $21 billion of debt comes due by the end of 2027. Yet Drahi seems in no hurry to sell major assets. Sales so far have included various media and data assets in France for about 3.5 billion euros, $1 billion for Teads, a European video ad platform once worth $5 billion, the giveaway of Cheddar to Archetype, with up to $50 million in payments if Cheddar reaches revenue targets, and the sale of a 24.5% stake in British Telecom to India’s Bharti Enterprises for 3.2 billion pounds ($4.2 billion). But that’s still a small fraction of what Altice owes.
Complicating his task is a growing lack of confidence in Drahi’s leadership, exemplified by the arrest last year of his chief lieutenant, Armando Pereira, for allegedly bilking Altice’s various units out of millions of dollars in purchasing scams. Drahi conceded he’d been caught flat-footed by the scheme.
“He built his empire on debt,” Coudry, the banker, told Bloomberg. “And it’s starting to crumple because of it. And he built his group with a small circle of people at the helm, which is also turning against him.”
Sotheby’s struggles
The most fashionable part of Drahi’s empire is Sotheby’s, the 280-year-old auction house that has stood alongside crosstown rival Christie’s as a symbol of wealth, taste, and power. But a major market downturn has left Sotheby’s struggling, and Drahi’s penchant for leveraging his assets may cost him control of the auction house. Leaked data published by The Financial Times in August showed Sotheby’s core income down 88%, amid a 25% drop in the value of art and other items sold in its auctions. A newly-opened Hong Kong office failed to muster enough worthy works to even hold its planned inaugural auction in the Chinese territory last month (Christie’s was able to go ahead with its Hong Kong sales).
Sotheby’s has other ills: Employees and contractors are finding payments and bonuses delayed, The Wall Street Journal reported, and around New York, at least, Sotheby’s employees say morale at the firm is low. A planned move to new quarters at the former home of the Whitney Museum of American Art, designed in the middle of the last century by the brutalist master Marcel Breuer, has been delayed. New York City real estate records indicate the sale hasn’t yet closed, despite Sotheby’s having already agreed to sell part of its current headquarters.
Drahi has also split Sotheby’s into three parts: the auction business, the buildings that house it, and the discrete business of lending money, both to collectors who offer their prizes for auction, and at high rates to buyers who purchase those same works. It’s all part of an effort to keep the market liquid and boost sale prices. But all of those businesses are now in a downturn.
Certainly, Sotheby’s has been the victim of an economic cycle that has hit the art market. That market has been contracting for the past two years after a pandemic-fueled wave of exuberance had stuck-at-home collectors paying high prices to cover their walls in trophy art, said Katya Kazakina, who writes the Art Detective column for industry publication Artnews, and closely follows the auction market. Even though the stock market is still up, few works now in collections are coming on the art market, and that’s pushing prices and auction revenue down.
Headwinds
“The rich people are still very rich, but psychologically, the market is seen as in a downturn and discretionary sellers are not in any rush to consign anything to auction when values have been falling,” Kazakina said in an interview. But part of the pressure on Sotheby’s is of Drahi’s own making, she added. “He’s leveraged other assets, and he’s leveraging Sotheby’s now, [but] auction revenues are down very significantly.”
With the Breuer move still on hold, Drahi agreed last month to take in a new partner and recapitalize the auction house. Abu Dhabi’s sovereign wealth fund, known as ADQ, has just put $700 million into Sotheby’s for an undisclosed ownership stake, and Drahi himself has put in $300 million. According to the results obtained by the FT, Sotheby’s will use the $700 million to “reduce the company’s leverage” when the deal closes this fall. But with more than $1.8 billion in net long-term debt as of June, Sotheby’s will still be carrying more than $1 billion in long-term debt.
The final countdown?
The overall debt load is staggering, and observers say there’s a good chance Drahi may lose his empire. Secured creditors, including major financial investors BlackRock, Elliott Investment Management, and Pacific Investment Management Co., are pressing for payment and appear tired of the financial engineering that’s moved some assets out of their reach. They’re proposing a new deal that would give them bonds they could convert into stock, potentially taking control of the companies from Drahi. Meanwhile, Drahi is in talks with Apollo Global Management, a fiercely competitive asset manager founded by Leon Black, to borrow enough cash to start paying back his creditors and win time to turn the companies around.
The problem is that, given the vast number of people switching off cable for online subscriptions, and the immense investments needed to keep cable and internet infrastructure up to date, there’s not much chance that Drahi’s various firms can actually generate enough cash to meet their heavy debt load.
Or as Malone, Drahi’s one-time mentor, told CNBC last fall, as Altice’s debt load became visibly stressed, “It’s all toast.”
