Protea Capital Management senior investment analyst Richard Cheesman said Canal+’s offer to buy MultiChoice could still result in a transaction being concluded despite MultiChoice’s rejection of the first offer.
Cheesman’s comments come after French media giant Canal+ made a non-binding offer to buy MultiChoice for R105 per share last week.
A few days after this offer was made, MultiChoice released a SENS announcement rejecting the offer.
MultiChoice said the R105 offer significantly undervalues the company, and – at this proposed price – Canal+’s letter does not provide a basis for further engagement.
However, MultiChoice reiterated that its board remains open to engaging with any party regarding any offer for a fair price and subject to appropriate conditions.
Despite this setback, Cheesman told Daily Investor that a deal could still be consummated. The probability is may have decreased slightly, but the potential price of any transaction could have increased.
He explained that MultiChoice’s rejection is seemingly a classic negotiating “dance” between companies in situations like this.
It is also in the best interest of MultiChoice shareholders for the company not to take the first offer, as it could lead to a higher offer and, therefore, a better price for shareholders.
MultiChoice has invested heavily over the past few years, particularly in its Showmax platform, which the company believes will make it the leading streaming service in Africa.
While it is still unclear whether these massive investments will pay off, there is a lot of potential and MultiChoice and its shareholders have yet to benefit.
If Canal+ were to buy the company now at what some consider a “low” price, it would reap the benefits of these investments, while MultiChoice shareholders would not.
Regardless of the offer price, Cheesman said MultiChoice’s rejection also indicates that this may not be a friendly merger between the two companies.
If it were, MultiChoice likely would have entertained the offer more or given Canal+ the opportunity to perform due diligence and conduct a thorough investigation into MultiChoice and its value.
MultiChoice’s rejection is not the only hurdle Canal+’s plan to buy MultiChoice faces, as there are several regulatory implications.
Notably, South Africa’s Electronic Communications Act (ECA) 36 of 2005 limits foreign control of commercial broadcasting services through strict ownership rules.
The legislation states that a foreigner may not, directly or indirectly, exercise control over a commercial broadcasting licensee. In addition, no more than 20% of the directors of a commercial broadcasting licensee may be foreigners.
This offer from Canal+ to buy MultiChoice comes after it bought a large stake in the DStv owner through the open market.
Over the past four years, Canal+ gradually increased its stake in MultiChoice – from 6.5% in October 2020 to just over 35% in February 2024.
This large stake appears to be a prima facie contravention of the ECA.
However, the ECA states, “a foreigner may not have a financial interest or an interest either in voting shares or paid-up capital in a commercial broadcasting licensee, exceeding 20%”.
Canal+’s voting rights have been limited to 20% through restrictions in MultiChoice’s Memorandum of Incorporation (MOI).
This would change if Canal+ were to buy MultiChoice, which the ECA seemingly prohibits.
However, Cheesman said exceptions can be made that would allow the deal to go through.
In addition, MultiChoice’s management team may be able to lobby for government support, and doing so would improve the likelihood of a potential deal going through.
Cheesman said it largely depends on what Canal+ is willing to commit to, and it has had time to plan its strategy while it has been buying up MultiChoice shares.
In its non-binding offer letter, Canal+ already made some allusions to the contributions it could add and mentioned the possibility of listing the company in South Africa.
It said this deal would “allow investors to benefit from the combination of Canal+ and MultiChoice, our ultimate goal being to also obtain a listing in South Africa”.
Canal+ said it has been a supportive major shareholder in MultiChoice, having grown its investment to become its largest shareholder.
“It is the ambition of Canal+ to create an African media business with enhanced scale, which can thrive in a competitive international market,” it said.
“A combination between Canal+ and MultiChoice would create a group with significant scale, putting MultiChoice on a secure long-term path and enabling the company to thrive.”
The company also said it recognises that economic transformation is important. “We are fully committed to being best-in-class in B-BBEE,” it said.
It also supports the participation of historically disadvantaged groups and acknowledges the key role played by Phuthuma Nathi.
“Our potential offer, if successful, would be an important next step for MultiChoice to realise its full potential,” said Canal+ chairman and CEO Maxime Saada.
“Combined with Canal+, MultiChoice would have the resources to scale, support local African talent and stories, and invest in best-in-class technology.”
Canal+’s 35% stake in MultiChoice should trigger a mandatory offer as per JSE regulations.
However, Cheesman said in this case Canal+ may not need to make a mandatory offer for MultiChoice despite breaching the 35% ownership level.
This is due to the foreign voting rights being capped and the 35% level being for voting rights, not ownership.
Cheesman explained that MultiChoice’s rejection of Canal+’s offer is not necessarily the end of the road for this deal.
If MultiChoice’s management were to reject or block the deal, Canal+ could still increase its stake by approaching shareholders directly and making offers.
This article was first published by Daily Investor and is reproduced with permission.