Surve finds he has no blue chips as he overplays his hand
One of the best known and truest aphorisms of banking is that if you owe the bank a million rand and you can’t repay it, you have a problem, but if you owe the bank a billion rand and can’t repay it the bank has a problem.
I suspect the controlling shareholder of the Independent Group, Iqbal Surve, had this idea in mind when he decided to list Sagarmatha on the JSE, after injecting the Independent Group and other businesses.
The listing was pulled on a technicality by the JSE 24 hours before the final hurdle. The company put a brave face on it, saying it would consider a listing on the New York and Hong Kong exchanges, with a JSE secondary listing, or perhaps a dual listing. Or it would sell some of the assets.
The company also affirmed that of the maximum R6bn it hoped to raise it had in fact raised R4bn through private placement, but it was unable to take advantage of the investment for legal reasons.
A lot has been written about Sagarmatha by both supporters and detractors, but I know at least one actual truth: the listing was an attempt to force the Public Investment Corporation (PIC), which manages government pensions, to invest in the company largely on the basis of that old banking aphorism.
The PIC lent R1bn to Surve to buy the Independent Group from the Irish company of the same name. A big slice of those loans is about to come due, so I suspect Surve thought he had the PIC over a barrel. Either it invests in his new venture or it all goes pear shaped. In which case, why not blast the valuation into the stratosphere?
As it turns out, the PIC didn’t play along. The potential investment didn’t make it past the first of four PIC committees that investments need to pass. The first examined only the valuation and decided it was nonsense.
Surve’s acolytes have claimed that the criticism directed towards the listing is rooted in the competitive position of their critics in the media, notably Tiso Blackstar, publisher of Business Day. This is somewhat true I suppose, but it’s also illogical.
Tiso Blackstar and Independent have roughly the same share of the print media market. Surve valued Sagarmatha at about R50bn, despite the fact that it has been losing money every year since he took over. Tiso Blackstar has a market cap of about R1bn. A successful listing of Sagarmatha would imply Tiso Blackstar is being massively undervalued. The second mistake Surve made was thinking that selling a chunk of the company on the basis of its huge potential as an internet disruptor and a potential black economic empowerment (BEE) champion would carry the day. As far as BEE is concerned, he managed to get the Black Business Council to invest R240m, but that didn’t come close to the R3bn required for the listing.
In some ways, you have to feel sympathy for Surve’s predicament. He was lent the money on the basis that he would create solidly ANCsupporting publications. After changing the editorships of many of the newspapers, he achieved this end. But doing so accelerated the disaffection of readers, both black and white. And the change coincided with economic stagnation and a retail downturn, crucial because media outlets are highly leveraged to the retail sector.
When I worked for The Star years ago it was selling 240,000 copies a day. It now claims to be selling 60,000, which is, I happen to know, overstated. Even if it is true, that’s a quarter of its high point. By comparison, over the past 10 years Business Day’s circulation has halved.
THE PIC NEEDS TO START THINKING ABOUT FORCING A MERGER, OTHERWISE A WHOLE BUNCH OF SA’S NEWSPAPERS WILL DISAPPEAR
As for the internet business bonanza, it is true that Independent Online (IOL) has gained readers over the past two years. But so has everyone else and often at a much faster pace. Business Day’s internet readership had doubled over the four years before the start of 2018 when we established a paywall. The leading daily news website remains News24, but IOL vies with EWN and TimesLive for the second spot.
When Surve bought the Independent Group in 2013, IOL was getting 1.4-million unique hits a month. Now it’s getting 4-million, an impressive achievement you would think. But TimesLive went from 70,000 to 4million. EWN started at 250,000 and is now at that same level. But no one has yet found the way to beat News24, which went from 2.5-million to 7-million.
So what now? It’s really for the PIC to decide, but the fact is that its well-meaning investment, aimed at returning the ownership of a local newspaper group to local hands, is kaput.
The PIC needs to start thinking about forcing a merger, otherwise a whole bunch of SA’s long-loved newspapers are going to disappear pretty soon. Cohen is senior editor.