SA Inc is up for grabs – dirt cheap
BARGAINS: RISKS WORTH IT FOR OFFSHORE SUITORS The MultiChoice offer by French media giant Canal+ reflects the rand’s weakness.
MultiChoice is not the first or last South African asset that will be snapped up by a foreign buyer. If Canal+ succeeds with its offer (and it will), this will be the fifth major South African company, after Pioneer Foods, Distell, Massmart and Imperial Logistics, to be acquired by a global player since 2019.
The rand’s steady depreciation against major currencies means our assets are cheaper than ever for suitors arriving with hard currency (dollars or euros).
The offer for MultiChoice illustrates this almost perfectly. To acquire the remaining 65% of MultiChoice at a higher premium than the first offer price – say, R120 per share – will cost Vivendi less than €1.7 billion (about R35 billion). The Canal+ Group will report annual revenue of more than 3.5 times this in 2023.
The official offer of R105 per share values the business, simplistically, on a price-earnings (PE) basis of 12. Before the spike on the buyout news, the group was trading on a PE ratio of below nine. On an estimated enterprise value-to-Ebitda (earnings before interest, tax, depreciation and amortisation) basis, the valuation is even more attractive.
In this case, it’s not just the valuation. This offer is somewhat unique, as the French outfit desperately needs the DStv operator for scale ahead of its proposed listing as a standalone entity.
Last year, it crossed the 25 million subscriber mark, which includes eight million in Africa and nine million in France. At the end of September, MultiChoice had roughly 22 million (with close to nine million in South Africa).
In the face of competition from global giants such as Netflix, Disney+ and Prime Video (Amazon), a 20-odd million subscriber business – even with around half of those generating revenue in hard currency (euros) – doesn’t really stand a chance. A pay-TV operator with close to 50 million customers suddenly looks a lot better.
SA Inc is on sale
PepsiCo paid $1.7 billion (about R24 billion) for Pioneer Foods. Heineken’s purchase of Distell valued that business at €2.2 billion. Walmart paid not even $0.5 billion (about R6 billion) for the 47% stake in Massmart that it didn’t already own. DP World paid less than $1 billion (about R13 billion) for Imperial Logistics.
Beyond just these larger transactions involving JSE-listed companies, Consol was purchased from its private equity owners by Ardagh Group for $1 billion in 2021. The acquisition by Digital Realty Trust valued data centre business Teraco at $1.7 billion.
There have been a span of more modest transactions. AdaptIT was sold to Canada’s Volaris in 2021/22, and Grand Parade Investments agreed to sell the local Burger King operation to Emerging Capital Partners just before the Covid lockdown.
Arguably, the country’s most well-known value investor, John Biccard, portfolio manager at Ninety One, has been vocal about the valuations of SA Inc stocks for years now. The largest “SA Inc” holdings in Biccard’s fund are Reunert, Life Healthcare, Caxton and Altron.
One or two of these may never be attractive enough to a foreign suitor, but he argues that “the low valuations attributed to these stocks (most on 5-10 times earnings and 4-10% dividend yields) reflect the market’s worries about politics, collapsing infrastructure and load shedding”. This is the dichotomy.
Many of these “SA Inc” businesses are well-managed, growing and profitable (often with outsize margins). They’re attractive enough that foreign firms are willing to pay a premium and deal with layers of regulation to get a deal done. These are dirt cheap, so the risks in operating in a market like this are worth it.