A R55-billion MultiChoice seems fair, not generous — analyst

Canal+’s valuation of MultiChoice considers the strength of the company’s core business but does not fully consider the DStv owner’s potential.

Urquhart Partners’ Richard Cheesman told Daily Investor that MultiChoice is an exceptionally difficult company to evaluate due to its structure and different components.

His comments come after Vivendi SE’s Canal+ made an all-cash formal offer for MultiChoice on 8 April 2024.

Canal+ valued the South African broadcaster’s shares at R125, leading to a total valuation of around R55 billion.

“The valuation of MultiChoice is quite complicated because there are multiple ventures currently emerging from startup J-curves,” he said.

“The group has made significant investments, some of which are paying off and others which are only expected to be profitable in the future.”

For example, he explained that the offer considers the challenges MultiChoice faces from Netflix, Amazon, and other OTT content providers.

It also considers MultiChoice’s capital position, which includes gross debt of R8.1 billion at the end of September 2023 and other liabilities the company has.

“Taking this into account, it looks like the core South African business is then valued at about nine times earnings, which seems to be in the right ballpark,” Cheesman said.

However, he said that while the offer may be fair, it does not seem generous.

For example, the offer may not take into account MultiChoice’s significant tax losses.

Cheesman said MultiChoice has about R23 billion worth of tax losses, of which around R16 billion are in Africa.

“It’s not clear if the group’s substantial tax losses have been taken into account, and one would expect that the merged group will have better profitability in Africa, meaning that these will be able to be utilised earlier than otherwise,” he said.

“MultiChoice’s tax losses have substantial value, which may not have been captured in this valuation.”

In addition, the valuation does not appear to consider the potential improved profitability from recently launched MultiChoice ventures like SuperSportBet and Showmax 2.0.

These ventures could experience J-curve growth and profitability, unlocking significant value for MultiChoice shareholders.

The valuation should also consider the impact of the Nigerian naira on MultiChoice’s profitability.

In June 2023, Nigeria implemented a naira free float, meaning the Central Bank of Nigeria no longer directly controls the currency’s exchange rate. Now, supply and demand in the foreign exchange market determine the value of the naira.

While this has meant some pain for companies like MultiChoice with large Nigerian operations, it will likely have long-term benefits for the currency and these companies.

Cheesman said it is also important to consider the synergies that could come from the merged group.

“There will be reduced content costs as all content producers will just have one company to negotiate with to sell all their content into the whole of Africa,” he explained.

“That position should be very valuable — being able to go to one entity and sell content to Africa’s huge and growing population.”

He said this would also mean reduced satellite lease costs, as the two parties will consolidate their satellite leases over time, reduced technology development costs, and potentially improved tax efficiency.

“There seem to be a couple of variables which may not have been taken into account in this offer price, and it would be difficult to say there’s a buyout premium here,” he said.

“It seems to be a fairish valuation, but it’s hardly a generous valuation. If you’re selling your crown jewels, there’s still room for improvement.”

Cheesman said that independent boards, such as MultiChoice’s newly formed one — which is currently considering the offer — seldom push back against offers, as these boards invariably seem to support the view of the management.

“It may be up to shareholders to push back if they similarly feel that there does not seem to be a substantial premium in this price,” he said.

This article was first published by Daily Investor and is reproduced with permission.