MultiChoice offers good value, even with competition from Netflix

MultiChoice is a good investment at current levels considering its strong South African operations, its expansion across Africa, and potential corporate action from Canal+.

This is the view of Protea Capital Management founder and CEO Jean Pierre Verster, one of South Africa’s top hedge fund managers and well-known for his successful shorts of African Bank and Steinhoff.

Verster said the company has been under pressure recently, but at the same time, Canal+ has been buying MultiChoice shares and increasing its shareholding in the broadcaster.

Canal+ is a pay-TV operator owned by French media giant Vivendi, which listed their Universal Music Group business separately.

It means the company has a lot of cash which it can now use to bulk up their other businesses, like Canal+.

“If you look at what is happening in the international pay-TV market, the big players are getting bigger. Whether it is Netflix or Disney with Disney+,” Verster said.

“There is consolidation happening, and I can foresee that in Africa, between Canal+ and MultiChoice Group, it makes sense for them to get together to become a bigger player and negotiate better on content from the big movie and TV studios.”

“I am hopeful that a deal can happen between these two players, and I think MultiChoice is a buy at these levels.”

He highlighted that Canal+ would have to sort out the minimum local shareholding within MultiChoice South Africa.

“This is not an impossibility seeing as there is already a Phuthuma Nathi BEE structure in place,” Verster said.

“I like MultiChoice. It is very cash generative in South Africa, it is expanding across Africa, and there is the possibility of some corporate action from Canal+.”

Jean Pierre Verster, Protea Capital Management founder and CEO

Richard Cheesman, a senior investment analyst at Protea Capital Management, expanded on their view that MultiChoice offers a good investment opportunity.

Cheesman told MyBroadband that MultiChoice South Africa’s operations alone might be more valuable than its current market cap.

Irdeto, a business unit of MultiChoice group that is a world leader in digital platform security, is another valuable asset.

It makes R400 million profit after tax, and there is potentially room to list a portion of it overseas as Altron has done and Datatec seems to be looking to do.

Another exciting opportunity for MultiChoice is online sports betting. In June, MultiChoice increased its stake in online sports betting company BetKing to 49%.

“BetKing is exciting, and the integration of betting with sports viewing is a global trend. The acquisition of 49% of this business for R5.5bn is pricey, however,” said Cheesman.

MultiChoice’s African operation, which has been loss-making for many years, is tricky to value.

Industry speculation suggests that Canal+ bid $1 billion (R14.83 billion) for MultiChoice Africa in 2018, and MTN offered R10 billion in 2017.

“MultiChoice generally has strong competitive positions across Africa, and a value around these numbers would be manageable for a large international operator looking to add a growth vector to its portfolio,” said Cheesman.

“Additionally, MultiChoice has generated significant tax-losses in Africa — around R23 billion — which will shield future earnings here from having to pay tax when profitability returns.”

Richard Cheesman
Richard Cheesman – Senior investment analyst at Protea Capital Management

The company is, however, also facing some headwinds.

There is increased competition from over-the-top (OTT) media players like Netflix, Disney+, and Hulu.

Sector regulator Icasa is also putting pressure on the local broadcasting industry to become more competitive, with MultiChoice directly in the firing line.

Other challenges include political issues around the SABC, changing of the guard in the C-suite, and the exorbitant Nigerian tax bill.

Cheesman said MultiChoice is well-positioned to weather most of these storms.

South Africa and Africa remain far behind developed markets when it comes to broadband penetration and affordable uncapped broadband, which hold OTT players at bay.

MultiChoice has also built an extensive, on-the-ground payments network that OTT players wouldn’t be able to replicate. “This is one of the reasons streaming services want to partner with MultiChoice,” said Cheesman.

Another advantage MultiChoice has over players like Netflix is sport, news, and significant local content.

“Locally, we have seen Netflix often playing the role of a complementary product to DStv rather than a replacement,” said Cheesman.

MultiChoice has also continued to grow its subscriber base, despite a decrease in the premium segment.

Commenting on a potential deal between MultiChoice and Canal+, Cheesman said they see the opportunity, means, and motivation for Canal+ to buy a larger stake in MultiChoice.

“There is little geographical overlap between MultiChoice and Canal+ in Africa, and there would be many synergies from a merger such as content costs, satellite leases, and perhaps expediting the use of the MultiChoice tax losses,” he said.

“MultiChoice and Canal+ have monthly feedback meetings and have collaborated on some content. We view this as informal due diligence being done.”

Cheesman said it is not easy to see the exact form a potential merger would take, but he believes separating the African and local operations would not make sense.

Now read: DStv Internet — why MultiChoice launched a data service

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MultiChoice offers good value, even with competition from Netflix