Phuthuma Nathi (PN) is MultiChoice South Africa’s (MCSA’s) public broad-based black economic empowerment (B-BBEE) deal that has allowed a broad set of black South Africans to become shareholders in MCSA.
PN1 and 2 together own 25% of MCSA. This is the most successful public broad-based BEE deal in South Africa, creating significant value for shareholders in capital growth and dividends paid. If an amount of R10 000 was invested in PN in 2006, it would have delivered over R92 000 in dividends (after tax) and have a capital value of R112 000 today. It currently trades on a historic dividend yield of 15.8% after tax.
MCSA’s parent company is MultiChoice Group (MCG), which is listed on the JSE and owns 75% of MCSA. PN shares are only permitted to be traded between qualifying black shareholders. This substantially limits liquidity and genuine price discovery.
This point is very relevant because MCG has made an offer to PN shareholders to sell 20% of their holding in PN in exchange for MCG shares.
In effect MCG will be buying more of MCSA (the crown jewel of the group), increasing its shareholding from 75% to 80%, depending on the take up of the offer.
One of the major benefits of this is it gives PN shareholders access to a larger, more diverse group and greater liquidity (on the JSE) in order to realise value.
So what’s the problem?
The price MCG is offering black shareholders is significantly below what we would consider to be a fair value for PN.
The exchange ratio is 0.957 MCG shares for 1 PN share. At the closing price of R129 for MCG this implies a price of R123.45 for PN.
This values PN on a price earnings multiple of about 5.6x – a substantial discount to fair value.
Besides delivering excellent returns for investors, MCG and PN have gone out of their way in the past few years to educate shareholders on the value of long-term investing. They have recognised that the core PN shareholder is an average Joe who has little experience in investing.
MCG and PN management have acknowledged that the value at which PN traded is well below its worth. I personally have been on the road with PN as part of this ongoing education drive, so I have seen and heard the stories of these shareholders. They are precisely the reason for raising this concern.
The fact of the matter is that when investors put their money into PN, they took on the risk that PN could have ended up the way African Bank’s deal did – where investors lost all their money.
That PN shareholders ended up with a significantly higher return than market should not be enough reason for MCG to table such a low offer now.
The price earnings multiple of the average South African direct-to-consumer business listed on the JSE is closer to 18x. The table above highlights this. If MCG offered a price that reflected the average multiple of the shares contained in the table [it would be] closer to a price of R486 per PN share.
If one were to factor in a discount for lower liquidity and a muted growth outlook of say 40% (which is a bit rich) you get to a value of around R292 a share. This is still significantly higher than the R123.45 a share offer on the table. Yes, the prospects for MCSA have deteriorated over the past few years, but the relative performance of MCSA suggests that it has weathered these challenges better than many of the other companies in the table above. Many of these companies’ prospects have also deteriorated yet they trade at a higher multiple.
What should PN investors do?
Investors are in an unenviable position of having to choose to either remain fully invested in an illiquid PN share with low-growth prospects but potentially high dividend yields, or swop out a portion of their shares at a price below fair value.
They will gain exposure to the African operations of MCG, which means higher risk and lower dividends in the short- to medium term.
The only real hope for PN investors is a change in broader B-BBEE policy, specifically one which recognises the principle of ‘once empowered, always empowered’.
It would take a brave person to bet on such a policy seeing the light of day.
Craig Gradidge is executive director of Gradidge-Mahura Investments