MultiChoice says it is not worried about being technically insolvent

MultiChoice Group CEO Calvo Mawela says they are not concerned about the company becoming technically insolvent, as it remains in a strong cash position.

“To non-financial people, they will just see negative equity and get a shock,” Mawela told MyBroadband.

“But we have been in discussions with our lenders, and they are still comfortable with the underlying business,” he said.

“They will only get worried they see the cash being burned, but so far, so good.”

MultiChoice reported its worst financial performance in history for its financial year ending 31 March 2024.

Losses ballooned by 42% to a staggering R4.1 billion as the company reported a 9% decline in active DStv subscribers and got hit by unfavourable foreign exchange rates.

The subscriber losses were felt across all markets, with DStv’s South African and Rest of Africa businesses experiencing a drop.

In addition to this dismal performance, MultiChoice’s balance sheet shows its assets have shrunk from R47.6 billion to R43.9 billion, while liabilities rose to around R45 billion.

With negative equity of R1.068 billion, MultiChoice cannot settle all its debts if forced to sell its assets and is technically insolvent.

However, Mawela said there is a mismatch between what IFRS accounting rules stipulate they must show on their balance sheet and the reality reflected in their bank account.

As an example, Mawela said Comcast has a put option against MultiChoice that it could theoretically exercise and must be accounted for.

A put is a derivative instrument that gives the holder the right to sell an asset to the writer of the option at a specified price by a specified date.

In this case, MultiChoice holds a R2.7 billion liability for Comcast’s put option against its share price.

Comcast subsidiary NBCUniversal acquired a 30% stake in Showmax last year.

Besides Comcast’s put, Mawela said they also decided to amortise the investment in their technology section.

However, these are all non-cash amounts being reflected on their balance sheet.

“There is no cash that is flowing out. We are still very strong in term of our cash position,” Mawela told MyBroadband.

MultiChoice illustrated the impact of foreign exchange losses, the Comcast put, and its technology modernisation impairment in the chart below.

While Mawela maintained that MultiChoice was on a solid foundation with its R2.8 billion in net available cash, analysts have sounded the alarm.

All Weather Capital chief investment officer Shane Watkins has said that MultiChoice’s results were truly appalling and might even be worse than the numbers suggest.

“There are lots of profits in the numbers which are artificial,” Watkins said.

“MultiChoice pushed between R1 billion and R2 billion of Showmax costs to next year, and decoder subsidies are R2.2 billion less than last year,” he said.

The lower decoder subsidies are because MultiChoice pulled back on them due to poor trading conditions.

There is also another R1.5 billion in once-off foreign exchange contract profits, which is unlikely to be repeated.

Watkins said if it weren’t for French media giant Groupe Canal+ propping up MultiChoice’s share price with its mandatory acquisition offer, it would be trading at around R60 per share.

He said investors should take their money and run as there was no guarantee the Canal+ deal would succeed.

The deal is still subject to several regulatory approvals, including from the Financial Surveillance department, the Competition Tribunal, the JSE, the Takeover Regulation Panel, and other government authorities.

Watkins also said no one knows whether Canal+’s offer to MultiChoice includes a clause to terminate the deal if there is a “material adverse change” — like the results the company just published.

Canal+ was forced to offer to buy MultiChoice after hitting a 35% ownership threshold stipulated in the Companies Act.

The French media conglomerate had steadily bought up MultiChoice stock on the open market since October 2020 and hit the threshold at the start of 2024.

After the Takeover Regulation Panel reprimanded Canal+ for exceeding the threshold and making a buyout offer without permission, Canal+ offered R125 per share, valuing MultiChoice at over R55 billion.

The buyout will cost Canal+ over R30 billion in cash, and the company has continued buying MultiChoice shares while its offer is being considered. Its last disclosed trades had Canal+’s shareholding at 45.2%.

Following Watkins’ analysis, MultiChoice announced that Sanlam was buying 60% of its insurance business, NMS Insurance Services (NMSIS), for R2.7 billion.

Sanlam will pay R1.2 billion cash upfront, with a potential performance-based cash earn-out of up to R1.5 billion.

The earn-out is contingent on the gross written premium generated by NMSIS for the financial year ending 31 December 2026.

Concerningly, MultiChoice said it would use the proceeds for working capital.

In other words, it is selling the family silver to fund its operations.

Wayne McCurrie from FNB Wealth and Investments said that taking all these factors together, he believes MultiChoice’s share price would’ve dropped to R40 or even R30 per share without the Canal+ deal.

McCurrie, Watkins, and David Shapiro from Sasfin Securities advised shareholders to “take their money and run” rather than hold out for Canal+’s offer of R125 per share, which may not materialise.