Are smaller investors in MultiChoice about to be ridden over by French entertainment channel Canal+?
It’s a question very much in focus as the pay-TV business — which began as M-Net in 1985 but now has 23.5-million customers in 50 African countries — has captured the attention of its Paris-based rival, owned by Vivendi.
MultiChoice was spun out of Naspers in April 2019 and listed on the JSE at R95 a share, valuing it at R42bn. Since then it has chugged along steadily, with shares hitting R155 in March — until last week.
That’s when brokerage JPMorgan Chase cut its recommendation on MultiChoice to “underweight” — effectively a “sell” — and sharply lowered its share price expectations from R130 to R80.
JPMorgan said “much higher Showmax investment, weaker Sub-Saharan Africa growth and load-shedding” contributed to the grimmer picture. “We downgrade our South African revenue outlook based on weaker subscription revenue, and declining South African advertising revenue, as load-shedding reduces advertising monetisation opportunities,” it said.
Showmax is MultiChoice’s big gamble on the future. In March, it signed a deal with US media firm Comcast (owned by NBCUniversal Media, which will hold 30% of Showmax) to create a pan-African streaming giant built on Comcast’s streaming platform.
It’s an ambitious, if expensive, plan: JPMorgan estimates an extra R1.2bn will be invested in Showmax this financial year, and R1.5bn in the next. This will result in “steep declining South African trading profit”, torpedoing dividends until 2026.
Investors took it badly, with MultiChoice stocks tumbling 13% from R94 to R83.
But JPMorgan isn’t an outlier. Chantal Marx, head of research at FNB Wealth & Investments, tells the FM clouds began to gather for MultiChoice this year, due partly to South Africa’s poor growth outlook and higher dollar costs for content. “Now you have the added risk of a large investment in the Showmax platform to contend with,” she says.
It sketches an unsettling picture — one not soothed by mounting anxiety about a stealthy takeover from Canal+.
Last month, MultiChoice’s annual report revealed that Canal+ has hiked its stake to 31.6% — a fivefold increase since April 2020, when the French company first took a 6.5% stake.
So what’s the game plan? Is Canal+ eyeing a complete buyout?
One insider tells the FM that before 2019, Canal+ wanted to buy MultiChoice’s African business outside South Africa outright, but was rebuffed. Is this the next-best option — buying in, perhaps hoping to force a split?
Asked about its intentions, Canal+ spokesperson Elvire Charbonnel told the FM: “We don’t comment about this information that has been announced by MultiChoice.”
MultiChoice was just as secretive. Its spokesperson Collen Dlamini said MultiChoice “does not comment on speculation and shareholder activity, nor can we speak to the intentions of Canal+”.
It’s a limp response which suggests CEO Calvo Mawela may be as much in the dark about the intentions of Canal+ as anyone else.
Technically, once any party buys more than 35% of a company it must make an offer to buy out all the other shareholders.
But in this case, it’s complicated by the Electronic Communications Act, which says “a foreigner may not, whether directly or indirectly, have a financial interest in a commercial broadcasting licensee exceeding 20%”.
While MultiChoice’s memorandum of incorporation limits foreign ownership to a maximum 20% of “voting rights”, the legislation surely trumps that.
So, how did this happen in the first place? Was communication regulator Icasa asleep at the wheel?
But given that it wasn’t even meant to get more than 20% in the first place, does this obligation still hold?
JPMorgan thinks so, saying “should Canal+ continue to acquire MultiChoice shares, it may have to make an offer to minority shareholders”.
Another analyst says it’d be deeply unfair if Canal+ bought more than 35% without making an offer to all shareholders. “They’d get effective control of MultiChoice without ever having to pay a control premium to minority shareholders,” he says.
Marx says “legal clarity” from the regulators is needed. “It complicates the investment case, because a buyout will technically be supportive of the price, but an absence of a buyout as an option could keep minority investors nervous, effectively allowing Canal+ to keep purchasing shares at lower price.”
Ultimately, it’s the Takeover Regulation Panel (TRP), mandated to ensure minority shareholders are treated fairly in takeovers, which will decide. Asked by the FM, the TRP’s Zano Nduli said: “We’re aware of the concerns but until Canal+ breaches that 35% level to trigger a mandatory buyout offer, we can’t speculate about what may happen.”
Either way, you’d hope Canal+ has some strategic plan for MultiChoice because in financial terms, it’s been a disaster. By the FM’s calculations, Canal+ spent about R15.7bn buying a stake which is now worth R12.1bn. In other words, Canal+ may have lost R3.6bn ($189m), 23% of its investment.
“It’s hard to say how this will play out,” says the analyst. “It may be that the local regulators, such as Icasa, tell Canal+ it has to sell its MultiChoice holding down to 20%.”
But there may be other options. For one thing, the MultiChoice Group owns 75% of MultiChoice South Africa (the licensee accountable to Icasa), while the Phuthuma Nathi scheme owns the remaining 25%. Potentially, MultiChoice could split its foreign and local operations, so that the Canal+ stake in the local business is capped at 20%.
Whether shareholders would give a thumbs-up to such a split is debatable. While the South African business still makes 64% of the money from the 9.3-million households it services, growth prospects elsewhere in Africa may be juicier (if you ignore Nigeria’s currency nightmare) — particularly if the Showmax plan bears fruit.
In the longer term, Marx says, there’s still value in MultiChoice, due to its “unrivalled sports and local content offering”, refinements to the streaming business and hope of less load-shedding.
But, she says, “the short-term risks are heightened, which could see the price remain suppressed for some time”. The enigmatic presence of Canal+ only adds to the fog.