Sanlam Private Wealth dumps MultiChoice
Sanlam Private Wealth says it has sold MultiChoice out of most of its clients’ portfolios due to the relatively high risk and low potential upside they see.
“We’ve taken a fresh look at the group’s prospects, and it’s not a business we would like to own over the long term,” said Sanlam Private Wealth investment analyst Dumisani Chiume.
“We decided to wait for the long-expected buyout offer before exiting at a price close to our own fair value,” he added.
“In our view, on a risk-adjusted basis, there are currently more compelling stocks to buy into in our relatively cheap South African market.”
At the time of publication, MultiChoice was trading at around R103 per share — close to the R105 per share buyout price Groupe Canal+ offered at the start of February.
The deal valued MultiChoice at around R47 billion, and the French media giant would’ve had to pay over R30 billion cash to buy the 64.99% of the company it does not yet own.
Further explaining their position, Chiume said that just five years ago, MultiChoice had substantial competitive advantages over rivals — metaphorical moats protecting its business.
The strongest moat was the quality of its content, including a leading local offering and sports broadcasting rights.
However, it is starting to lose these advantages.
“DStv, MultiChoice’s direct broadcast satellite television service that operates in 54 countries across sub-Saharan Africa, enjoys a majority market share mainly due to its sports broadcasting rights,” stated Chiume.
“[These] are key for subscriber retention.”
He predicted other players would likely start giving MultiChoice a run for its money in this arena.
“A case in point is the recent drama around the rights to the Africa Cup of Nations football tournament, which MultiChoice has broadcast since 1992,” noted Chiume.
“In January, the group declared its SuperSport pay-TV service had secured the broadcast rights to the event — a week after it had announced it would not be airing it this year after failing to secure a sublicensing agreement.”
DStv dishes at an apartment block. Photo by: Mary Doggett / Shutterstock.com
Other competitive advantages once held by MultiChoice have started to unravel more aggressively.
“For example, with data costs having substantially declined over the past decade, the cost of switching to competitor products is now far lower,” said Chiume.
“And the rival offerings are alluring — affordable mobile-only plans from Netflix and others have made it much more difficult for MultiChoice to retain subscribers.”
Moreover, MultiChoice appears to be allowing sole distributor agreements to lapse.
“For instance, HBO is no longer granting exclusivity to MultiChoice and is now also using Netflix to distribute its popular shows,” Chiume said.
He also said that international players like Netflix, Disney+, and Amazon Prime Video are competing aggressively on price in South Africa while offering a wide range of content.
“They have also been catching up in the creation of local content, which has in the past differentiated MultiChoice from these players,” he said.
Chiume acknowledged that DStv still offers excellent local content and that MultiChoice has its Showmax streaming service, which should help it defend its market share.
“However, the price that MultiChoice can charge is limited by the competition,” he said.
“Put differently, if there is a mass migration from DStv to Showmax, this will likely come at lower margins than MultiChoice is used to.”
Chiume also noted that pay TV and video streaming are not mutually exclusive.
“The two mediums could conceivably coexist over the long term,” he said.
“Pay TV on the continent still has some runway, which is likely what has attracted the Canal+ offer.”
He also said there were definite scale benefits to combining the MultiChoice subscriber base with that of French-speaking Africa’s leading pay TV operator.
“In fact, Canal+ has been buying up shares in MultiChoice since 2020.”
Canal+ logo on a sign in France. By: sylv1rob1 / Shutterstock.com
Regardless of whether Canal+’s acquisition of MultiChoice goes ahead, Chiume said DStv would likely struggle to defend its profit pool or grow it in real terms.
He said that, in South Africa, it faces high fixed costs of the business that impacts profitability.
Echoing commentary from MultiChoice’s financial reports, Chiume said constant load-shedding has also led to subscriber losses, particularly in the Compact Plus and mid-range customer segments.
“Further afield, the tough Africa macro environment in which MultiChoice operates has created a potential share price overhang impacting the long-term investment case for the group,” he said.
“In Nigeria, which accounts for nearly half of MultiChoice’s non-SA revenue, the group has fallen foul of the authorities more than once, racking up huge fines in the process.”
Just this month, MultiChoice announced that it had reached a 35.4-billion naira settlement with the Nigerian federal government over a 1.8-trillion naira tax dispute.
At the time of the complaint, the rand-naira exchange rate brought Nigeria’s claim to around R63 billion.
At the time of publication, the settlement was around R450 million, although it is unknown what exchange rate will be used to settle the fine. The naira’s value against the rand plummeted by around 33% at the start of February.
“In general, MultiChoice has seen fairly large losses from its African operations over the years,” Chiume said.
“While management has done a reasonable job in getting these businesses to break-even levels, forex volatility and the cost of expatriating funds are likely to impact profitability over the long run.”
Chiume said that the bottom line was that the slow evaporation of MultiChoice’s moat impacts the price-earnings ratio you can justifiably pay for the shares.
Although its South African operations are cash-generative, this business is now mature, and there is not much prospect of earnings growth over the short term.
“Africa outside South Africa is a very poor-quality earnings stream,” Chiume stated.
“Showmax may eventually deliver a fair margin, but it comes with potential execution risks.”
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