MultiChoice is not the first or last South African asset that will be snapped up by a foreign buyer. If Canal+ succeeds with its offer (and it will), this will be the fifth major South African company, after Pioneer Foods, Distell, Massmart and Imperial Logistics, to be acquired by a global player since 2019.
The rand’s continued steady depreciation against major currencies means our assets are cheaper than ever for suitors arriving with hard currency (dollars or euros).
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The offer for MultiChoice illustrates this almost perfectly. To acquire the remaining 65% of MultiChoice at a higher premium than the first offer price – say, R120 per share – will cost Vivendi less than €1.7 billion (R34.73 billion). The Canal+ Group will report annual revenue of more than 3.5 times this in 2023.
The official offer of R105 per share values the business, simplistically, on a price-earnings (PE) basis of 12. Before the spike on the buyout news, the group was trading on a PE ratio of below nine. On an estimated enterprise value-to-Ebitda (earnings before interest, tax, depreciation and amortisation) basis, the valuation is even more attractive.
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In this case, it’s not just the valuation (although that part makes the deal an almost no-brainer for Canal+).
This offer is somewhat unique, as the French outfit desperately needs the DStv operator for scale ahead of its proposed listing as a standalone entity.
Last year, it crossed the 25 million subscriber mark, which includes eight million in Africa and nine million in France. At the end of September, MultiChoice had roughly 22 million (with close to nine million in South Africa).
In the face of competition from global giants such as Netflix, Disney+, and Prime Video (Amazon), a 20-odd million subscriber business – even with around half of those generating revenue in hard currency (euros) – doesn’t really stand a chance. A pay-TV operator with close to 50 million customers suddenly looks a lot better.
Listen/read: Why Vivendi SE’s Canal+ wants to buy out MultiChoice
And sure, there are tons of synergies that can be extracted from a combined group – especially with the two largest expenditures for pay-TV operators: satellite transponder leases and fees for sports rights.
Still, the hardly opportunistic offer for MultiChoice (Canal+ has been steadily building a stake for years) shares a common trait with other buyouts of mid-caps in recent years.
SA Inc is on sale.
PepsiCo paid $1.7 billion (R24.4 billion) for Pioneer Foods.
Heineken’s purchase of Distell valued that business at €2.2 billion.
Walmart paid not even $0.5 billion (R6.4 billion) for the 47% stake in Massmart that it didn’t already own.
DP World paid less than $1 billion (R12.7 billion) for Imperial Logistics.
Beyond just these larger transactions involving JSE-listed companies, Consol was purchased from its private equity owners by Ardagh Group for $1 billion in 2021. The acquisition by Digital Realty Trust valued data centre business Teraco at $1.7 billion.
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These are small sums of money, relatively speaking.
More modest transactions
Of course, there have been a span of more modest transactions.
Linde bought the remainder of Afrox that it didn’t already own for R2.8 billion in 2020. AVI Limited’s Snackworks business attracted Mondelez’s interest two years ago, but this deal never progressed. AdaptIT was sold to Canada’s Volaris in 2021/22, and Grand Parade Investments agreed to sell the local Burger King operation to Emerging Capital Partners just before the Covid-19 lockdown.
Arguably, the country’s most well-known value investor, John Biccard, portfolio manager at Ninety One, has been vocal about the valuations of SA Inc stocks for years now.
Read: These 10 JSE companies are ripe for buyouts
In his quarterly investment commentary for December, Biccard says: “We see a number of parallels to 2001 for SA-centric shares – all-time low valuations (7 times P/E multiples and 7% dividend yields), an absence of foreign investors (global EM funds are half-weight SA in their portfolios relative to the benchmark) and (unlike 2001) unprecedented selling of SA stocks by domestic holders following the lifting of the offshore limit to 45% for balanced funds. Domestic balanced funds now hold just 38% of their portfolios in SA equities versus nearly 70% 15 years ago”.
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The largest ‘SA Inc’ holdings in Biccard’s fund are Reunert, Life Healthcare, Caxton and Altron. One or two of these may not ever be attractive enough to a foreign suitor, but Biccard argues that “the low valuations attributed to these stocks (most on 5-10 times earnings and 4-10% dividend yields) reflect the market’s worries about politics, collapsing infrastructure and loadshedding”.
“While we can see these obvious headwinds, the most important short-term worry is loadshedding, and we believe that the current valuations of ‘SA Incorporated’ stocks imply that loadshedding will be a permanent feature in SA. We don’t agree and see a clear path to reduced and eventually zero loadshedding in SA.”
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This, then, is the dichotomy. Many of these ‘SA Inc’ businesses are well-managed, growing and profitable (often with outsize margins), and they provide access to attractive markets (including South Africa). They’re attractive enough that foreign firms are willing to pay a premium and deal with byzantine layers of regulation to get a deal done. These are dirt cheap, so the risks inherent in operating in a market like this are worth it.
When it comes to SA Inc companies on the JSE, local investors simply don’t agree.
