On February 9, 2015, Les Echos, a French newspaper, related the governance vision of Altice-Numéricable’s Executive Chairman, Patrick Drahi: “Governance is a word I don’t really like. In companies there are bosses, and the boss is me.”
The principle behind governance is precisely to create a number of counter-powers, monitoring and verification to ensure that decisions are carefully discussed and considered and risks collectively insured to avoid autocracies and ensure that all stakeholders are respected including the providers of capital, the shareholders. When analysing the general meeting of Altice held on the 1st of June, Proxinvest soon realizes that Patrick Drahi was true, governance is really a word he does not like.
First of all, in order to participate in the General Meeting, shareholders must go to Senningerberg, Luxembourg, a convenient destination for Moselle residents, much less for the other shareholders. Indeed, Altice SA is a company registered in Luxembourg, a small country in size, renowned as a tax haven but also for its low requirements for shareholder rights and corporate governance. It is in fact what attracts headquarters of companies in favor of controlling shareholders or managers less regarding of the rights of minority shareholders. In 2011 Luxembourg was also sentenced for non-transposition within the notice period of Directive 2007/36 / EC of 11 July 2007 on the exercise of certain rights of shareholders in listed companies. The shareholder used to certain rights offered by the French framework can quickly feel distraught after reading the notice of the general meeting of Altice, especially at the time of completing the voting form by proxy when he realizes that resolutions have been mixed up and that the said voting form must be returned much earlier to be valid. With the Luxembourg company law there is neither a vote on agreements, the procedure of control of sensitive contracts with related parties, nor a disclosure of individualized remuneration of each director (introduced by the NRE Act, 2001 in France).
The ECGS proxy report prepared by the French partner Proxinvest recommends investors to oppose the remuneration policy and the amendment to the stock-options plan. The reading of the 2014 annual report of Altice can be somewhat unsettling. On page 37, Proxinvest discovers that the value of options granted in 2014 to Patrick Drahi is € 75 million, the same as for his right arm, the CEO of Altice, Dexter Goei. Fortunately, accustomed to valuing stock options, Proxinvest soon realizes that this « value of options » can not be the fair value at the date of allocation normally calculated under IFRS standards in the summary tables on remuneration but corresponds to a simple multiplication of the number of options granted by the exercise price of the said options. This method of calculation makes little sense.
In Note 24 of the consolidated accounts, Proxinvest discovers the valuation made by the company or its auditors for that options plan: a value between 3.40 and € 4.02 per option using the Black & Scholes model. Bizarre according to the Proxinvest analysis which used the same method and the same valuation parameters: the Black & Scholes model establishes the value at € 6.43 per stock option (Proxinvest communicated its calculations the company to understand the gap but has yet to hear back from the company). Multiplied by 2.65 million options received by Patrick Drahi, the total value of his option award therefore reached € 17 million. In comparison, the average pay of an executive chairman of the SBF 120 is only € 2.9 million according to the latest Proxinvest study on executive remuneration. Patrick Drahi receives no other remuneration from Altice (fixed or variable), but this award far exceeds the amount of the maximum socially acceptable remuneration defined by Proxinvest since these stock-options correspond to the equivalent of 972 SMICs (the French minimum wage). Admittedly, Patrick Drahi controls the majority stake in Altice and the free-float there is only 25%. Thus, in theory nothing prevented him from taking even more and the minority shareholders’ position remains precarious to prevent drifts on remuneration policies.
Of course, these stock-options can in theory be worthless when they expire in January 2024, they may in fact only be exercised if the price exceeds the exercise price of € 28.25 which is the stock market introductory price dating from January 2014. Minority shareholders in Altice can only welcome the share’s good run since the introduction since the closing of 20 May 2015 was 129 € and the unrealized gain on the award of options is already € 261 950 000 for each of the two managers. However, it is likely that the same performance would have been achieved even with ten times less options granted and that the incentive nature of such an allocation on an executive shareholder is almost nil. Shareholders will concern themselves with whether the performance is sustainable or not. In late January 2016, half of these options can already be exercised, only two years after being granted and without any performance conditions other than the share price, while shareholders generally expect lasting performance and measured performance conditions over 3 to 5 years. The challenges for Altice remain and will linger during the coming years. The strategy is very risky and facing a net debt that now stands at 33 billion euros, the slightest operational misstep or turnaround in the sector will be dangerous…
