Foreign ownership rules likely to stop Canal+ deal — experts

● Black shareholders invested in MultiChoice via its Phuthuma Nathi empowerment scheme could get a chance to remain invested if the sale of the pay-TV group to French entertainment giant Canal+ succeeds, giving them exposure to lucrative new markets.

The pay-TV group submitted an offer to the MultiChoice board to buy out the shares that it does not already own in a deal worth R31bn. Canal+ is MultiChoice’s largest shareholder with a 33% stake acquired over the past few years.

Canal+, owned by French media and entertainment conglomerate Vivendi, said the acquisition of MultiChoice would create a group with enough resources and scale to compete with US giants who dominate the global video content market.

Canal+ CEO and chair Maxime Saada said the group would keep MultiChoice’s BEE structure and “this may require Phuthuma Nathi to stay as shareholders”.

Canal+ will keep MultiChoice listed on the JSE [and] ultimately this “may result in Canal+ not owning 100% of MultiChoice because the shares will have to be listed and some will go to BEE investors”.

Industry experts have flagged the Electronic Communications Act, which caps foreign ownership of local licensed broadcasting companies at 20%, as a potential risk to the deal. MultiChoice’s memorandum of incorporation says foreign owners’ voting rights are limited to 20%, even if their holding is more than that.

Saada said Canal+ has found a solution to deal with the regulatory requirements.

“We have looked at it with a number of experts and are very, very confident that there is a solution. We can’t fully disclose but we are confident that the matter can be resolved. We wouldn’t have made the offer if we didn’t believe so.”

Since Canal+ already holds shares in MultiChoice and wants to buy the rest, the Independent Communications Authority of SA said it expects no obstacles to the deal as Canal+ is proposing acquiring all the shares of Africa’s pay-TV operator at group level and not at the level of subsidiary MultiChoice Pty Ltd, the licence holder. This means Canal+ and MultiChoice will not contravene foreign ownership regulations.

However, a regulatory expert who spoke on condition of anonymity was adamant that the regulations would be a stumbling block because the group ultimately owns the subsidiary. The expert said Canal+ “is oversimplifying the seriousness of the regulatory hurdle” as it has the potential to drag the deal into huge losses for all parties if it were to collapse.

Justine Limpitlaw, an electronic communications law specialist, was also sceptical that the deal would get the green light. She

said the Electronic Communications Act of 2005 does not allow Icasa to grant an exemption from the 20% foreign ownership rule. “I can’t see how this can be done without a legislative amendment.”

Icasa did not provide further clarification when asked how this would work since Canal+ would also acquire the licensee, MultiChoice Pty Ltd.

Peter Takaendesa, head of equities at Mergence Investment Managers, said it is not clear how the situation (the 20% voting limit) will change if Canal+ decided to acquire 100% of MultiChoice.

“It’s possible they may have South African shareholders as partners in the transaction to avoid Canal+ going to 100%.”

Canal+, which is preparing a separate listing after being unbundled from parent company Vivendi, has a presence in more than 50 countries across Europe, Africa and Asia. It owns and operates 20 production companies and has been actively involved in Africa for 32 years.

Saada said for MultiChoice to continue to thrive in Africa a strategy is required that enhances its scale as well as strengthens local and global expertise. The industry in which MultiChoice is operating is becoming increasingly globalised and competitive, with regional media companies having to compete with the firepower of global media titans with enormous resources to invest in content, marketing and technology. Scale is the only way to survive and thrive, he said.

“The competitive environment has changed with the increased adoption of the internet. Companies that are thriving are US platforms. To compete and thrive you need scale. This deal is not what’s in it for us, but for both companies. This is an opportunity to be the only independent player [able] to compete with American platforms.”

The deal will diversify the geographic footprint of MultiChoice, mitigating localised risks and market volatility.

Saada said if the combination did not proceed, “this lack of scale is likely to become a more acute problem in coming years, risking the company’s status as the pre-eminent media company in Africa and affecting its midterm trajectory”.

He said heavy investment in content and technology is needed to ensure the creators could produce quality African stories not only for local customers but for a global audience. Canal+ invests €1bn in technology annually.

“Hollywood has been telling its own stories very well for decades and Europe has also started but I think the continent with the most stories today that haven’t been told is Africa. That’s a key differentiating factor for new companies to tell African stories.

“To be blunt, what is lacking is money and resources. For people in Europe to watch African content you need to have world-class production standards. I am not saying it hasn’t happened but hasn’t happened a lot,” Saada added.

Shows such as Shaka iLembe and Spinners, which Canal+ co-produced, have the ability to grow global audiences, and “we need to make more of those but they are expensive hence I believe the combination [of MultiChoice and Canal+] will be fantastic.”

Canal+ has about 8-million subscribers in 23 countries on the continent, while MultiChoice has 22-million in 16 countries.

The Canal+ offer to MultiChoice comes as the pay-TV group prepares to launch its revamped Showmax platform in partnership with Comcast’s NBCUniversal and Sky.

Saada questioned the decision to partner Comcast. “We partner with most American companies all the time. A question for me is why give a stake in a company [Showmax], which owns the platform that is the future? I think it should be fully owned by MultiChoice.”

MultiChoice owns 70% of Showmax and the rest is owned by NBCUniversal.

Saada said while most clients are still subscribing to the traditional direct-tohome or satellite TV platform, Canal+ has started selling its streaming and traditional satellite pay-TV across all its operations as a package — and there has been triple-digit growth of subscribers in Africa connecting to the online services.

The company has not yet approached any MultiChoice shareholders, only the board, he said.

MultiChoice said the high-level letter from Canal+ expresses a “nonbinding intention to make an offer to acquire” the remaining ordinary shares. It said it was reviewing the letter and would provide an update if there are further developments.