“The M&A dance is in full swing,” is how Protea Capital Management’s Jean Pierre Verster describes MultiChoice Group’s rather curt rejection of Canal+.
Not only has it rejected the R105 cash offer for each of the 65% of the shares the French group doesn’t own, but MultiChoice has taken the unusually forceful step of terminating year-long discussions with the French entertainment group, and withdrawing the cautionary announcement.
Peter Takaendesa, portfolio manager and head of equity at Mergence Investment Managers, says he wasn’t surprised MultiChoice rejected the nonbinding offer, given the “anticipated” price, but he was surprised at the sudden full withdrawal of the cautionary. “Both sides are posing at this stage,” he tells the FM.
He says Canal+’s offer is opportunistic, even though it represents a 40% premium on the share price prevailing before the offer announcement. “The share price has been destroyed over the past 12 months or so but the average shareholder probably came in at around R120,” says Takaendesa, adding this means shareholders are unlikely to be enticed by R105.
Particularly as the knock to the share price reflects investors’ impatience with earnings that were lower than expected due to the hefty investment in streaming platform Showmax and to considerably weaker African currencies — rather than to any fundamental flaw in MultiChoice’s long-term growth outlook.
Still, investor sentiment was hardly helped by a 40% slump in free cash flow at the interim, which means there’s little hope for full-year dividend payments.
Just because it has stopped dancing with Canal+ — for now — doesn’t mean MultiChoice has flounced off the M&A floor entirely
But just because it has stopped dancing with Canal+ — for now — doesn’t mean MultiChoice has flounced off the M&A floor entirely. In its rejection announcement the board said it “remains open to engage with any party in respect of any offer which is for a fair price and is subject to appropriate conditions”. Unsurprisingly, this has sparked speculation that other parties might be waiting in the wings to make a bid. Multichoice, evidently, has opened up its dance card.
Takaendesa doesn’t hold out much hope of a merger deal with the most likely, and possibly only other, candidate, Comcast — the US media conglomerate that owns broadcaster NBCUniversal and UK’s Sky Group. Though Comcast, which owns 30% of Showmax, has developed a close working relationship with MultiChoice as they seek to develop the streaming platform, Takaendesa believes the mutual interest is limited to Showmax. “Comcast does not appear to be interested in MultiChoice’s satellite-based products,” he argues.
And it’s unlikely that any potential suitor, including Canal+, would want MultiChoice without Showmax.
So back to Canal+ and its puzzling decision to risk antagonising the MultiChoice board by making a derisory offer. While it does not have the same operational relationship as Comcast, the French group must know MultiChoice well. As Verster points out, Canal+ has been buying MultiChoice shares for more than three years. “They would have done a lot of research and wouldn’t waste their time and money coming this far if they felt they didn’t have a good chance of success with the shareholders and the regulators,” says Verster.
He points out that though Canal+ has already moved beyond the critical 35% share-ownership level, a unique clause in MultiChoice’s memorandum of incorporation (MOI) restricts the voting rights of foreign shareholders to a total of 20% no matter how large their shareholding. The Companies Act requires a mandatory offer at 35% of voting rights.
So MultiChoice’s MOI has created regulatory shelter for Canal+ to build a substantial stake. It has also created a bit of a conundrum for the Takeover Regulation Panel. But the clause doesn’t address the restrictions imposed by the Electronic Communications Act (ECA), which limits foreign holdings to 20% of economic as well as voting rights in MultiChoice South Africa, which has a 25% BEE shareholding.
Verster believes one way to get around the ECA restriction is for Canal+ to buy everything except the South African business. Back in 2018 Canal+’s parent Vivendi made an offer to Naspers for MultiChoice’s African business, says Verster, speculating that South Africa may not be its primary interest.
Alternatively, the French company, which obviously plays a very long game, might accommodate a much more generous BEE stake in MultiChoice South Africa. This might be acceptable in light of the proposed lifting of the ECA foreign-holding restriction to 49.9%. Asked about this restriction, Maxime Saada, CEO of Canal+, told the Financial Times: “We have taken expert advice on the matter and we believe we have a solution.” He declined to provide details.
Takaendesa said upping the BEE stake is the most practical solution if the ECA restriction is lifted to 49%. Such a move might also help a merger progress through the competition process.
But looking at this M&A dance routine from a broader perspective, there’s almost a historical inevitability about Canal+ cementing a deal with MultiChoice. They were after all dance partners of sorts decades before the 2018 offer to Naspers. In 1996 Canal+ became one of the largest television groups in the world when it bought its Dutch-based rival NetHold, a company jointly owned by Naspers’s pay-TV subsidiary MIH and Richemont.
There’s almost a historical inevitability about Canal+ cementing a deal with MultiChoice
Koos Bekker, as CEO of NetHold at the time, was the force behind its plans to create a strong presence in Europe, the Middle East and Africa. Richemont helped with the funding until the remarkable pace of growth called for too much of it.
The 1996 transaction resulted in Richemont getting a 15% stake in the enlarged Canal+ and MIH getting 5% plus the transfer of NetHold’s operations in Africa, the Middle East, Greece and Cyprus to MIH.
The deal also resulted in Bekker heading back to South Africa and, as former Naspers chair Ton Vosloo recounts in his autobiography, in Naspers having money to invest. “The big question was where and what sector to invest in,” Vosloo quotes Naspers director Charles Searle as saying.
Investment opportunities in pay TV were rare and overpriced but the relatively new internet looked interesting. “In terms of geography Koos was keen on China.” Bekker started visiting China and early in 1998 Naspers set up an office in Hong Kong that was run by Hans Hawinkels, who within a year or two came across Tencent. And the rest, as they say, is history.
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