Mzwanele Manyi, a staunch defender of the Gupta family, will be grossly overpaying for the family’s media empire over the next few years after agreeing to buy television channel ANN7 and The New Age newspaper for R450m.
Oakbay Investments, the Guptas’ investment vehicle, is vendor-financing the deals, whereby Manyi’s Lodidox and management will take Oakbay’s 65% shareholding in ANN7 operator Infinity Media Networks for R300m, and its two-thirds stake in TNA Media for R150m.
Documents seen by the Financial Mail show that 22 months ago accounting firm Cajee Razak & Associates placed Infinity’s value at between R40.5m and R60.6m, valuing Oakbay’s shares at R39.4m.
The valuation was done for the sale of most of the shares owned by Indian shareholder Essel Media, which owns Zee Entertainment on the subcontinent, to Oakbay last year. Essel retains a 5% stake in Infinity.
Working on a number of assumptions — including 2% GDP growth and a 10% market rate of return — Cajee Razak gave Infinity Media an enterprise value of R52.2m based on the present value of its future earnings, which dropped to R40.5m when its assets and liabilities were taken into account.
On a discounted cash flow or absolute value basis — another popular valuation method — the value of Infinity’s shares was placed at R60.6m.
SA’s GDP rose 1.3% for the 2015 year, dropping to 0.3% the following year. The JSE all share index delivered an 8.28% return between the date of Infinity’s valuation and the announcement of the deal on Monday — negating two key assumptions used to pump up Infinity’s value.
Manyi did not respond to detailed questions about how Oakbay’s interest ballooned between 395% and 640% to R300m in less than two years, and the repayment terms of the vendor-financing deal.
Vendor-financing agreements usually entail payment for the seller’s shares from future dividends declared by the businesses acquired by the buyer.
But Infinity had not declared a dividend from its founding up until Essel sold its interest.
The price tag also had business people scratching their heads.
Dirk de Vos, director at transaction advisory firm QED Solutions, says the deal is absurd.
"TNA/ANN7 were never set up to be viable media outlets," he says. "They are simply tools to cover for or promote or defend the wider project of state capture in the interests of the Guptas."
He says the calculation (or valuation) is about how much the Gupta family is prepared to lose on ANN and TNA so they can keep on capturing the state.
"If the valuation is as they say it is, either the Guptas will need to pay a lot of capital gains tax, or the set-up costs and the accumulated losses over the past four years do amount to R450m."
"Both ANN7 and TNA would be quite cheap to run and it shows. State support or adspend is just to help stem losses, not to be sustainable," De Vos adds.
Pavlo Phitidis, CEO of the Aurik Business Accelerator, said in a radio interview earlier in the week that the R450m suggested the businesses were making "very substantial profits, which [are] quite hard to believe at this point where we are in the media industry.
"It would need R80m a year in profits," he said.
At its February 2015 year-end, Infinity made R2.2m in net losses, on sales of R106.6m and R88.6m in operating expenses.
Infinity’s fortunes were projected to turn when it changed its year-end to November that year, with net profit at R22.5m on the back of slightly lower sales and brutal cost-cutting, with the company spending just R45.5m on operating expenses.
But then the company was expected to deliver diminishing profits in the five years after that due to rising operating expenses. For the 2016 year, Infinity’s profits were projected at R21.4m, plunging to R10.8m by 2020.
