The other week, Israeli content recommendations company Outbrain (Nasdaq: OB) announced a huge deal whereby it would buy supply-side platform and video monetization company Teads for $1 billion. For Outbrain, headed by David Kostman (until recently joint-CEO with founder Yaron Galai), this is an acquisition that will change the face of the company, the announcement of the deal claims.
Outbrain reached Wall Street in a wave of technology company flotations in 2021. It has a current market cap of $237 million, after losing about 75% of its value since the flotation. The company hopes that the merger with Teads will create one of the biggest digital advertising platforms for the open Internet, capable of providing solutions for a customer’s entire campaign across all platforms - smart televisions, computers, and mobile apps.
The deal is important for the sellers too. The money will be used to reduce debt. Teads, which works with big global brands, is part of French-Israeli billionaire Patrick Drahi’s Altice Group, a telecommunications, media, content and entertainment group founded in 2001 and active through subsidiaries around the world.
Drahi (61) was born in Morocco into a Jewish family. He moved to France with his family when he was young, studied engineering, and went to work at Philips. An article published about him in "The New York Times" a few years ago stated that Drahi was "bored and frustrated" by the corporate bureaucracy and decided to go his own way.
In the 1990s, he founded a cable television company that operated in southern France and was later sold. Drahi sold his shares in the acquiring company for tens of millions of euros during the dot.com bubble. In 2001, he founded Altice, and through it began buying European cable television companies.
Activity in the US and Britain
The group later expanded to the US as well. For several years, Altice was traded on the Euronext Amsterdam stock exchange. The company was floated in 2014 with a valuation of €6 billion. Within a short time its market cap more than doubled, and then plunged by about 80% because of fears about its high leverage, a constant feature of Drahi’s businesses. In 2021, Drahi bought the public’s shares at a price slightly higher than the flotation price, and delisted the company.
Through Altice International, Drahi completed a takeover of Israeli telecommunications group Hot in 2011, and in 2012 he delisted the company, which had a market cap of NIS 3 billion at the time. Altice also holds about a quarter of the shares in British telecommunications company BT, which is listed on the London Stock Exchange with a market cap of almost £13 billion. Drahi also owns i24 News, which broadcasts in French, English, Hebrew and Arabic. He also owns auction house Sotheby’s, which he took over in 2019 at a valuation of $3.7 billion.
Drahi is married and has four children who all work in his businesses: Altice USA, Sotheby’s, and the family’s philanthropic organization The Patrick and Lina Drahi Foundation.
$55 billion debt
In 2015, Forbes magazine estimated Drahi’s net worth at $16 billion, making him the wealthiest person in Israel at the time. Since then, however, his wealth has shrunk by almost two-thirds, and is currently estimated at about $6 billion. The main reason for the decline is his tendency to leverage his businesses highly.
Altice Group was founded and expanded through leveraging and loans, sometimes aggressively. Now, with global interest rates higher than they were a few years ago, raising the cost of servicing debt, while at the same time the value of telecommunications companies has fallen, this leverage is liable to become a problem. Altice is trying to solve it by, among other things, selling assets such as Teads. According to reports in the past few months, other assets of the group are also up for sale. A report by Reuters a few months ago stated that, in view of the debts of Altice France, its creditors believe that Drahi will prefer to avoid reaching a debt settlement through the courts, and will even agree to forego part of his holding in that company.
Drahi’s Altice Group is, as mentioned, made up of several interconnected companies. One of them is Altice International, which is the unit selling Teads to Outbrain. There is also Altice France and Altice Europe.
A few years ago, the group spun off Altice USA, which became an independent company, and is now traded on the New York Stock Exchange at a market cap of $772 million, seven years after being floated at a valuation of $22 billion, representing a decline of 95%.
Like Drahi’s other companies, Altice USA is highly leveraged, with net debt totalling $24.6 billion at the end of the second quarter of this year. At the end of the first quarter, Altice International had debt of €9.2 billion, made up of bonds - some of which are now traded at double-digit yields, indicating investors’ fears about repayment - and loans and drawdowns of credit lines. In the first quarter, the company paid €193 million in interest on its debt.
At Altice France, the debt at the end of the first quarter was higher, at €24.3 billion, and quarterly interest payments totalled €316 billion. Altogether, Drahi’s companies have debt of $55 billion.
Altice International bought Teads, which is now being sold to Outbrain, in 2017 for €285 million (about $307 million), so the sale at more than three times that amount represents a handsome exit.
Nevertheless, Altice had expected to liquidate its holding in the company at a much higher valuation. In 2021, Teads filed a prospectus for a flotation on Nasdaq at a valuation of up to $5 billion, five times the valuation at which it is now being sold. The IPO was scheduled to take place in July of that year, by which time the market had started to cool down, and in the end Teads had to give up on the plan and withdraw the prospectus, because of what were described as inadequate market conditions.
Outbrain itself did manage to make an IPO in July 2021, after cutting the valuation it was aiming at to $1.1 billion. As mentioned, like many companies floated at that time Outbrain has since lost most of its value, and it is now traded at about a quarter of the valuation at which it is acquiring Teads.
Incidentally, after the failure of the IPO, it was reported a year ago that Altice was seeking to sell Teads for $3 billion, and that it had hired the services of investment bank Morgan Stanley to that end. The name of Israeli ad-tech company Tremor was touted as a possible buyer.
In the end, Altice had to compromise on a much lower amount, some $1 billion, partly in Outbrain stock. The structure of the deal is that Outbrain will pay Altice $725 million cash, $25 million in a deferred cash payment, and the rest in shares.
The deal will turn Outbrain into a highly leveraged company. At the end of the first quarter, it had $232 million cash. In order to pay for the Teads acquisition, it has secured financing of $750 million from Goldman Sachs, Jefferies, and Mizuho Bank, which will also provide a credit line of $100 million. The Israeli company apparently believes that the synergy arising from the merger will enable it to repay the debt within a few years and create value for its shareholders.
In its announcement of the sale of Teads to Outbrain, Altice International commented on its debt, and stated that it continued to aim at a ratio of net debt to EBITDA of 4-4.5 by the end of 2024. At the end of the first quarter, the ratio was 5.
Published by Globes, Israel business news - en.globes.co.il - on August 11, 2024. © Copyright of Globes Publisher Itonut (1983) Ltd., 2024.