After presiding over the most successful BEE transaction in SA’s history, MultiChoice Group has taken steps that will subtly reverse some of the gains of the black investors in the SA unit. In a scheme that must be taken up by October 28, MultiChoice is offering to exchange up to 20% of the shares in Phuthuma Nathi for stock in the listed entity.
In reality, investors who fall for this gimmick will be robbed of a far more valuable investment opportunity.
Phuthuma Nathi’s only asset is a 25% stake in MultiChoice SA, which accounts for about 80% of the group. MultiChoice owns the rest of the shares. If MultiChoice has its way, it will exchange each Phuthuma Nathi share for a 0.97 share in MultiChoice Group.
There are several problems with this deal. The first is that it will allow MultiChoice to claw back the extra 5% given to Phuthuma Nathi when MultiChoice was unbundled from Naspers and listed on the JSE a few months ago. That was a R2.6bn gift of 22.5 million shares – in my opinion, to sweeten the departure of Tencent Holdings from the JSE, and to ensure the local MultiChoice unit retains a BEE stake above the mandatory 20%.
Should the buyback succeed and the company acquire the maximum 13.5 million Phuthuma Nathi shares it can take, MultiChoice will issue 13.09 million new shares in the group. The cost at the current price would be R1.6bn. Effectively, MultiChoice will book a R1bn profit. And who will be paying? The Phuthuma Nathi investors. The very investors empowered by the 2006 deal will be paying to empower the group.
While MultiChoice is selling the deal as an attempt to ease liquidity in the blacks-only Phuthuma Nathi market, the truth is that it will result in fewer Phuthuma Nathi shares being available to trade, achieving the exact opposite of the stated rationale.
By my calculations, and input from financial analysts with an interest in Phuthuma Nathi, investors are being asked to give up a lucrative opportunity for the blue sky that is the 15 other African operations of MultiChoice.
The market capitalisation of MultiChoice stands at just under R52bn. If we’re being generous, the local unit accounts for about 95% of that; the balance comes from Irdeto, a Dutch software company. SA alone has 7.4 million pay-TV subscribers, while the group’s 15 other operations together have 7.7 million. These are loss-making operations.
So investors in Phuthuma Nathi are being asked to swap their stock in a company with a historic dividend yield of 19.5% for an opportunity that promises to one day pay dividends.
Since the inception of the Phuthuma Nathi deal at R10 a share in 2006, the share has jumped to R112.50. Each share has paid a cumulative dividend of R92, including the R22.22 share dividend in August. In other words, a R10,000 investment in 2006 is worth R112,500 and has paid a dividend of R92,000.
Of course, MultiChoice keeps reminding investors throughout the offer document that the deal is completely voluntary. But many of its investors are less than sophisticated; they may accept anything that comes from the company’s management.
I am keeping mine. And MultiChoice Group CEO Calvo Mawela tells me he’s keeping his Phuthuma Nathi shares too.