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Caught between a rock and a hard place

Phuthuma Nathi shareholders caught out by MultiChoice Group’s low offer.

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

COMMENTS   12

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I think Multichoice will be facing a lot of headwinds going forward.

I downgraded recently but find it astonishing how easy it is to stream almost anything for free (uncapped wifi at home). I am not a fundi but managed the World cup rugby and F1 Grand Prix over the weekend.

I used a laptop but I have noticed that there are app’s available that allows you to do it via your phone.

Somehow I think this is going to get easier and more common going forward.

Which websites did you use for the 2 events??

What has MultiChoice given to subscribers ? The ones who have given the money every month ……………. NOTHING

MultiChoice days are numbered …… way too expensive

It’s not the price, it’s the quality of rubbish they air.

Below inflation for the last decade. Not their fault you can’t keep up

Most people invested in this will take whatever deal seems sweeter without considering the value proposition of the business. Sure the more mature South African market isn’t likely to grow as it should in the future with losses to premium subscribers and a push for a streaming only package but I’m Africa the real Africa things are still different. A satellite TV service will rule for many years to come. And when markets such as Nigeria and Ghana mature, DRC and Sudan will be opening shop. Think long term!

Put very simply, Multichoice has missed several boats.

They are after all Naspers.

i.e. The ones showering themselves in glory over one lucky bet in buying a stake in a Chinese company.

I don’t see the issue, they’re offering it in line with their own share price. Perhaps all the traders of MCG have gotten it wrong that the share price is so low? I don’t see any reason that PN, which is illiquid, share trade at a premium to the same company on another exchange? Otherwise the arb guys will also just short the share till it matches anyway.

Unless PN investors have a desparate need for liquidity I would stay invested in PN and keep pocketting that 16% dividend yield…

Right on! MCG will look after PN shareholders, many of whom are politically influential people. MCG needs a licence to operate so will curry political favour where it can.

Multichoce are a subset of the looting anc, authorised to do and charge what they like as long as the cadres and black viewers are given preferential treatment…particularly those in other countries.

They forget all too quickly who gave them their initial leg up to print money!

“Phuthuma Nathi … a broad set of black South Africans to become shareholders”

Howe man y of the “broad set” are not ANC or union grandees, their families, trusts, friends, donors or other members of the nomenklatura?

End of comments.

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