Why Alan Knott-Craig bought MXit

Summary: Moneyweb editor Alec Hogg discusses World of Avatar’s acquisition of MXit with Alan Knott-Craig Junior. Knott-Craig will take over as CEO of MXit from Herman Heunis.

ALEC HOGG:  In this Boardroom Talk special podcast Alan Knott-Craig Junior joins us.  Junior because Alan, your father is probably still a little better known than you at the moment, being the former CEO of Vodacom. But you’re shaking things up a little at the moment…

ALAN KNOTT-CRAIG JNR:  Thanks – nice to be on the show.

ALEC HOGG: Just tell us about the deal that you’ve concluded today – let’s start off with MXit and exactly what it is – it’s described as a free mobile online instant messaging facility that many people under the age of 25 would know immediately – and I guess perhaps Moneyweb community members wouldn’t be that well engaged with it.  Just give us an understanding if you would.

ALAN KNOTT-CRAIG JNR:  MXit comprises about 40 million registered users in about 120 countries that are looking for a cheap way to send SMSes.

ALEC HOGG: So it’s that simple…

ALAN KNOTT-CRAIG JNR: Yes, that’s basically what it is.

ALEC HOGG: And the revenue model?

ALAN KNOTT-CRAIG JNR:  The revenue model – they basically sell advertising and they also sell content to the people that are using the service – they sell wallpapers, and they sell ringtones and things like that.

ALEC HOGG: Is it profitable?

ALAN KNOTT-CRAIG JNR:  I can’t disclose the figures, just in terms of the sale agreement – not until we’ve taken physical handover, which will only be 1 October.

ALEC HOGG: But is it profitable though? Does it make money or not?

ALAN KNOTT-CRAIG JNR:  MXit South Africa makes money.

ALEC HOGG: OK so it is an international platform at a time when social media and this kind of facility is becoming more – or hitting the mainstream investment market.

ALAN KNOTT-CRAIG JNR:  Well I’d say that it’s very much a social media play and unlike almost all other social media plays that I know of, it actually makes money. So it’s quite a nice company.

ALEC HOGG: Is it a competitor or would it be a similar business to Tencent, the business that’s done Naspers so proud?

ALAN KNOTT-CRAIG JNR:  Yes.

ALEC HOGG: So it’s similar, but non-Chinese presumably.

ALAN KNOTT-CRAIG JNR:  Yes, basically it’s an African version of Tencent.

ALEC HOGG: And I see that you’ve bought out the founders of MXit and Naspers had a stake there – why would they want to sell.

ALAN KNOTT-CRAIG JNR:  You’ll have to ask them.

ALEC HOGG: Let’s just start off with the price then – clearly you haven’t disclosed anything yet, but can you give us an idea of the size.

ALAN KNOTT-CRAIG JNR:  I wish I could – I would – it’s my natural instinct. But again the sale agreement says it’s not to be disclosed.  All I can say is that I think it was good value for all parties.

ALEC HOGG: Is it hundreds of millions of rands?

ALAN KNOTT-CRAIG JNR:  I can’t disclose…

ALEC HOGG: Just give us an idea – is this a really big transaction?

ALAN KNOTT-CRAIG JNR:  It is a really a big transaction – in my world.

ALEC HOGG: What’s the intention with the company from here?

Alan Knott Craig Jnr

ALAN KNOTT-CRAIG JNR:  The first thing is we’re not really going to change things overnight.  It’s not like we’re going to go in there and it’s going to suddenly become something else.  The kind of heart and soul of it is going to be what it’s always been and that’s the kind of secret to its success.  But we do have some tricks up our sleeve over the next few months.  I’d say the initial path is just go and settle things down – it’s got 150 people there so it’s not just 10 people and things are just going to carry on and once we’ve got a handle on everything then we’ll make public what we want to make public.

ALEC HOGG: From your perspective – your business is called the World of Avatar – you started that after you sold out of iBurst.  Are you completely finished with iBurst now?

ALAN KNOTT-CRAIG JNR:  Yes I left iBurst in August 2009.

ALEC HOGG: And have you reinvested all of your money and other people’s money in this transaction?

ALAN KNOTT-CRAIG JNR:  Yes.

ALEC HOGG: So do you have any institutional shareholders or bigger shareholders you can tell us about?

ALAN KNOTT-CRAIG JNR:  Just private investors – individuals.

ALEC HOGG: People who presumably understand this market well.

ALAN KNOTT-CRAIG JNR:  Well I’m not sure I understand this market well, so I would say it’s people that are excited by this market and interested in this market and want to be exposed to this type of asset.

ALEC HOGG: You’ve said you’re not going to tell us about the pricing but we do know that social media has been in great demand around the world.  We’ve got clearly the listing of LinkedIn, Groupon – we know where the share prices of Facebook are likely to settle.  Is this not a time when you should be selling social media rather than buying?

ALAN KNOTT-CRAIG JNR:  I know there’s a lot of talk about social companies being over valued and I think that some of them probably don’t have much upside left, but in this case, this is nowhere near the valuations – based on the valuation metrics that the Facebook’s of the world are being valued at and I genuinely think we got a fair deal.  The sellers got a great deal – they certainly can’t complain and Herman deserves every cent that he’s made – he’s built something amazing over the last 15 years but we don’t feel that we don’t have much runway.  It’s pretty good value and if it’s one-tenth of the things we think we’re going to come off, then we should be smiling.

ALEC HOGG: That’s Herman Heunis – is he going to stay with the business?

ALAN KNOTT-CRAIG JNR:  No he is moving on.

ALEC HOGG: Why is that?

ALAN KNOTT-CRAIG JNR:  I think you should ask him but just personally, what I know of him, he’s just tired – he’s been working like a slave for so many years now and he just needed a break.

ALEC HOGG: And you’re going to be moving in here full time to run the business.

ALAN KNOTT-CRAIG JNR:  Yes – I’ll hand over the reins at World of Avatar to my partner Francois Swart and I’ll be the fulltime CEO of MXit.

ALEC HOGG: Which is based where?

ALAN KNOTT-CRAIG JNR:  In Stellenbosch.

ALEC HOGG: Right in Stellenbosch – so you don’t even have to move or relocate your houses.

ALAN KNOTT-CRAIG JNR:  No – it’s actually perfect – Stellenbosch is actually the best place – at least it is as far as I’m concerned to live so I’ve no intention of moving offices.

ALEC HOGG: Well it certainly is termed as the new business power centre – so you seem to be in the right place.  But from a broader perspective, if this is as you’ve described it, the African version of Tencent and we know how much investor focus there has been on Tencent, and indeed pretty much any other similar type of social media play, is that where you might end up one day?

ALAN KNOTT-CRAIG JNR:  In China…

ALEC HOGG: No with serious big investors coming and looking for you.

ALAN KNOTT-CRAIG JNR:  I must be honest, I hope not.  It’s quite nice just with the types of shareholders I’ve got at the moment.  But you can never say never and right now it’s actually a dividend play.  We’re not doing something here where we expect the value of the asset to increase and then it’s a flip.  It’s really just – we get in there, we make sure this business pays a nice healthy dividend and we take it from there.

ALEC HOGG: Who are the competitors?

ALAN KNOTT-CRAIG JNR:  In a South African context, in the space that MXit plays, there is no competitor that’s close.  The closest competitor would be BBM.

ALEC HOGG: For Blackberry…

ALAN KNOTT-CRAIG JNR:  Yes.

ALEC HOGG: But the other players – Google and Apple have got similar processes or services that they’re wanting to launch into this market.  Does that not concern you that when these big giants come along, they might squeeze you out?

ALAN KNOTT-CRAIG JNR:  Yes it scares the hell out of me, so I’m certainly not ignorant to those  risks.  But we’ve got a bit of a window of opportunity so the types of things they focus on aren’t necessarily applicable to most people in an African context – but it’s just a matter of time before it is.  I do also think and know for a fact that South Africans in general underestimate how competent and how good our products are compared to those value giants and we wouldn’t be doing this if we didn’t feel we had a chance.

ALEC HOGG: For sure, and I suppose also the fact that you’re an Afro-optimist and there aren’t really that many around in the world just now.

ALAN KNOTT-CRAIG JNR:  Oh I must say there are more nowadays than there were a few years ago so I’m pretty bullish on Africa, especially relative to the rest of the world.  I think Africa – lots of opportunity – not too much competition from these big giants like Facebook and it’s our home turf…

ALEC HOGG: What about the other bets that you’ve been taking in World of Avatar.  Are they in a similar space?

ALAN KNOTT-CRAIG JNR:  A bet is a strong world, but yes they’re all in a similar space.  If it fits the broad definition of mobile, web-based and consumer-facing – we’re in and all of the companies are generally doing that.  They all work on the basis that so long as we’re helping people make money via their mobile phone we should give it a go, and MXit is very complementary to them and they’re very complementary to MXit, so it all fits together.

ALEC HOGG: And the technology that underlies MXit – is that more than world class?

ALAN KNOTT-CRAIG JNR:  I’m no engineer but I’ve got an excellent chief operating officer coming with me into MXit by the name of Dr. David Webber.  As far as we’re concerned, it can beat anything out there – anything, from any of the companies in the world that for an instant messaging platform, this is as robust as you’ll ever get.

ALEC HOGG: So the difference in MXit going forward, clearly the product itself is not going to change – you told us that.  The founder will be gone.  What will you bring to this company that perhaps he couldn’t?

ALAN KNOTT-CRAIG JNR:  I wouldn’t say he couldn’t – I just think – and these are his exact words – “we’re going to bring energy” and it’s a super human effort to have got it this far against all the odds, and we’re just going to come in and inject a little bit of fresh new energy and a little bit of fresh perspective, I guess.  Hopefully that’s enough.  It’s not like it needs – it’s not a turnaround – it’s a great success.  It’s like one of the greatest success stories to ever come out of South Africa – especially in the text space, and we’re just hoping that we don’t mess it up.

ALEC HOGG: How come you were lucky enough to do the deal?

ALAN KNOTT-CRAIG JNR:  The right place, right time – I just started talking to them at the right time and the moment and we got along well.  We had a meeting of the minds about what he thinks the business should be and where I think the business should be and the fact that we wanted to keep it in local hands, etcetera and just down the line it was meant to be…

ALEC HOGG: Were there foreign suitors?

ALAN KNOTT-CRAIG JNR:  There were some apparently, but we weren’t pitching against – I don’t think we were fighting against anybody else in the process.

ALEC HOGG: This was just a process – you know each other – he felt that he was a bit tired and wants to perhaps enjoy the fruit of his efforts and you were the right guy to take it on from here…

ALAN KNOTT-CRAIG JNR:  Yes that’s probably what it is but maybe he’s got a different opinion, but that’s what I think.

ALEC HOGG: And he hasn’t kept a stake at all?

ALAN KNOTT-CRAIG JNR:  No.

ALEC HOGG: Why not?

ALAN KNOTT-CRAIG JNR:  It’s his baby and he had to make a clean break or he couldn’t break. It’s really his heart and his soul so it was hard enough to have a stake there and keep looking over his shoulder – it would have been a bit much and from our perspective – the reason that we also bought the Naspers stake is we don’t necessarily want passive shareholders in any of our companies. We either want the people running the company as an equity holder or it’s all us.

ALEC HOGG: What about your almost as famous as you, father – is he going to be involved?

ALAN KNOTT-CRAIG JNR:  To answer that question, I don’t know.  You should ask him…

ALEC HOGG: I’m asking you but is he one of those private investors?

ALAN KNOTT-CRAIG JNR:  No.

ALEC HOGG: He’s not because he must be able to bring a wealth of experience and understanding if you do need him on a board.

ALAN KNOTT-CRAIG JNR:  Yes and an absolute ton of cynicism, so he holds me back – I’ve got some guys around me managing to hold back my youthful optimism, but for now, he’s just a trusted advisor.

ALEC HOGG: It’s such an exciting story – we wish you the very best and maybe a listing one day.

ALAN KNOTT-CRAIG JNR:  Thank you very much Alec.

ALEC HOGG: Alan Knott-Craig Jnr, chief executive, or he will be soon, of MXit – a South African success story.

Source: Moneyweb