Video entertainment firm MultiChoice believes the imminent merger deal with French media giant Canal+ will play a significant role in changing the company’s faltering fortunes.
So said Tim Jacobs, MultiChoice group CFO, today in an interview with ITWeb following the release of its annual financial results for the year ended 31 March.
The company is also looking to boost operational efficiencies at its burgeoning video streaming platform Showmax as a key intervention to grow group revenue.
Among the key highlights of the results, MultiChoice yesterday revealed that linear subscribers were down 1.2 million or 8% year-on-year (YOY) to 14.5 million active subscribers. Group revenue declined by R5.2 billion or 9% YOY to R50.8 billion.
In May, the Competition Commission recommended the Competition Tribunal approves, with conditions, the proposed $30 billion transaction whereby Canal+ intends to acquire MultiChoice.
This, after Canal+ made a mandatory offer to acquire the MultiChoice shares it does not own, for a consideration of R125 per share.
According to Jacobs, the merger deal will assist MultiChoice with bigger scale.
“This means it’s going to make us more sustainable, and we will be able to take some significant synergies and costs out of the business, which means it will benefit all shareholders,” he said.
“I think that each company has some unique strengths and if we can tap into these strengths, we can effectively eliminate some weaknesses in the operating models of both companies. From a customer perspective, it will give us longevity – it will give us access to the kind of scale that you need to develop new technologies like we have in Showmax.
“Initially, we were worried about our strategy being different to their strategy but now that we’ve had more talks with them over the last year, I think everybody is a lot more comfortable with what the potential combination could look like.”
Showmax investment takes toll
During the reporting period, active paying Showmax subscribers were up 44% YOY, reflecting healthy growth and gaining regional market share.
While Showmax recorded growth in subscribers, Jacobs said the company will not be solely focusing on streaming services going into the future.
“We will focus on both linear and streaming. Showmax did incredibly well but the difficulty that we’ve got is the massive investment that we’ve made. The net trading profit for Showmax this year was negative R4.9 billion. For that, we need to have a subscriber growth that is significantly more than the 44%.”
In the year ahead, he said, MultiChoice will try to fix some of the operational challenges in Showmax.
“We will need more payment channels and better customer journeys. Our customers are having to click too many times to access our products, and we need to build more integrations that work well for customers with our key distribution partner.
“We are working on that operational side of the business but, at the same time, we have to reduce the running loss in the [Showmax] business. While we are doing that, we are looking at how we can reduce the costs in that business.”
He pointed out that Showmax is beginning to gain market share on some of its key competitors in the video streaming space.
Describing the challenges faced in the year, Jacobs said the business had a complicated and mixed set of results.
“Firstly, we have seen a very soft consumer environment and our consumers across the continent faced very high inflation outside of South Africa.”
He pointed out that big markets like Nigeria were sitting with inflation that was over 30% until the central bank recalculated the inflation to 25%.
“Interest rates are high in all markets – South Africa’s interest rates are high and Nigeria is sitting on over 20%.”
Power is still a major problem, he noted. “For the most of last year, Zambia has been sitting at 20 hours of no power per day. It stabilised recently to about 17 hours per day, but it’s still significant. This means we lost about 38% of that base on top of the 44% that we lost last year. So, it has been quite brutal in Zambia and quite understandably.”
According to Jacobs, the level of indebtedness in the South African market and the high unemployment rate has meant the ability to afford discretionary spend like DStv has been limited.
“The interesting dynamic if we look at the rest of Africa market is that we lost most of the customers in the first six months of the year. We are now starting to see some stability in the rest of Africa for the first time. That was the most challenging part of our year.”
Standing firm
To compensate for the losses, Jacobs said the company has been quite disciplined in cutting costs across the group.
“We managed to wrap up our costs from R1.3 billion in the first half to R3.7 billion recurring savings for the full year. That’s significant because it amounts to 7.9% of our costs that we removed from our base this year.
“If you break it down, it means last year we had trading profit of R7.9 billion. Between price increases and cost savings, we delivered R1.6 billion of incremental trading profit for the group.”
He stated that the core business, excluding Showmax, delivered a R9.5 billion trading profit this year.
“We had to invest in Showmax and the big incremental investment came predominantly from content and technical platform costs. That was an incremental R2.3 billion over last year. If we look at the number after that investment in Showmax, we delivered R7.2 billion in trading profit, which was down by 9%.
“In the context of a very weak consumer environment, where we lost R5 billion of topline revenue, I think that was a very credible outcome. Obviously, we would have wanted to do better, but it was a pretty credible outcome.”
The other challenge was foreign currency, Jacobs revealed. “We also have to consider what happened with foreign currency because currencies like the naira only started moving in February/March last year.
“However, we still saw a significant depreciation of the naira in the second half of the year. That means we absorbed another R3 billion of foreign currency this year, and as a consequence of that, we ended up with our trading profit down 49% at R4 billion.”
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