Why Manyi’s purchase is pretty clever

THE GUPTAS ARE UNLIKELY TO EVER RECOUP THE R450M You can strike a deal at whatever price you want, if the value of the currency in which you pay is equally meaningless, or if (most of) the debt’s likely to be written off.

Yesterday’s big news was that Jimmy Manyi bought ANN7 and The New Age from the Guptas for R450 million. Predictably, there’s been an eruption of cynical comments and probing questions. How can Manyi afford it? How’s it possible that these businesses can together be worth nearly half a billion rand, when most ‘old media’ outlets are battling – in SA, and globally?

There’s a clue in the fine print: the deal will be vendor financed. Basically the Guptas are selling their businesses to Manyi, but he won’t have to pay much (if anything) upfront, as they’ve agreed to wait for the money and be paid from future profits (if any).

While there’s nothing wrong with a vendor financing arrangement in principle, it only really makes sense in the case of a sound business with a healthy dividend stream. When the founder of a rapidly-growing business decides it’s time for a successor, they’ll often sell a substantial stake to the next generation similarly. Considering the realities of a market interest rate, which needs to form part of such an arrangement, it means the business must produce a dividend yield which exceeds the implied interest rate, for the buyer to make any dent in the overall debt obligation over time.

Based on the numbers we know, we’ll assume there was no down payment and base the calculation on an initial debt of R450 million. SA’s prime interest rate is 10.25% - we’ll give Manyi the benefit of the doubt in classifying him as a prime counterparty.

In addition to the periodic interest, the remaining question is how long the Guptas will be prepared to wait for their R450 million of capital value that’s being “realised” today. Five years? Possibly. Ten years? Perhaps. Longer? Doubtful…they’re trying to “take profits” and exit, after all?

Back-of-a-matchbox calculations show: at a 10.25% interest rate, paying off R450 million over five years would require a R9.62 million monthly instalment. If the Guptas are more patient and prepared to get their money back over a decade, the instalment drops to R6 million per month. I’m no media expert, but that sounds like a lot of moolah, after paying salaries and other overheads.

Call me a sceptic, but the Guptas are unlikely to ever recoup the R450 million amount (in present value terms). Whatever your views of Jimmy Manyi, give him credit: it looks like he’s taken a fairly cheap call option (if not free), while probably not incurring any realistic downside in the process. That’s pretty clever business, if you ask me.

Deon Gouws is CIO of Credo Wealth in London