Naspers frees cash-rich MultiChoice to take on Netflix

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Satellite dishes connect Khayelitsha to the DSTV television network.
Satellite dishes connect Khayelitsha to the DSTV television network.

South African media and e-commerce group Naspers' plan to spin off MultiChoice, Africa's biggest pay-TV business by subscribers, will free up cash for the unit to compete with fast-growing Netflix and other streaming services.

The group, which owns a $155 billion one-third stake in Chinese technology giant Tencent, unveiled plans on Monday to hive off MultiChoice to help close a more than 60% discount in its share price to the value of its holding in Tencent.

This leaves MultiChoice free to fend for itself in an increasingly competitive market where Netflix is already supplying thousands of viewers with original TV content and Hollywood hits such as "Stranger Things" and "House of Cards".

"The intention is to basically have absolutely minimal debt going to MultiChoice to provide them with flexibility to make any strategic move they want to make," said Naspers chief executive Bob van Dijk. "We're not going to suck any cash out of MultiChoice."

Although streaming is still rare on a continent hobbled by slow Internet speeds, reaching fewer than two million of Sub-Saharan Africa's billion citizens, it is increasingly challenging more popular satellite-TV services.

MultiChoice's fledgling Internet-streaming service, Showmax, is betting a blend of Hollywood blockbusters and local content such as "Real Househelps of Kawangware" and "The Bachelor South Africa" will set it apart from rivals. It launched Showmax in 2016.

Naspers does not provide subscriber numbers for Showmax, but London-based Digital TV Research estimates it had 334 000 at the end of last year, fewer than half as many as Netflix and mostly in South Africa.

Cash in hand

MultiChoice had R7.5 billion cash at the end of the latest financial disclosure period in March, generated largely from subscription fees of as much as R809 a month from some of its 13.5 million households across the continent.

"The listing of MultiChoice Group will create a leading entertainment business on the JSE that is profitable and cash generative," said MultiChoice CEO Imtiaz Patel in an e-mail reply to questions.

The company did not provide details on how it would deploy the money but said its balance sheet would allow it to pursue growth opportunities in African video entertainment and pay a "meaningful dividend" to shareholders. Analysts also expect it to scale up Showmax.

"I expect them to be quite a good dividend paying stock, but on the other hand, it is an industry that is facing structural change so I expect them to continue to invest in Showmax to defend the position," said Renier de Bruyn, a portfolio manager at Sanlam Private Wealth.

MultiChoice's dominant position in most of its markets makes it unlikely to seek to acquire rivals.

Founded in 1915, Naspers has transformed itself from an apartheid-era newspaper publisher into a $100 billion behemoth thanks largely to cash flow from MultiChoice that enabled it to pursue private-equity style investments in e-commerce platforms across the world.

According to Digital TV Research, the number of pay-TV users in Sub-Saharan Africa - a region of more than a billion people - is expected to jump by three-quarters between 2017 and 2023 to nearly 41 million, with more than half of that signing up for satellite TV offerings.

Over the same period, subscriptions for streaming services - which include Kwese, Cell C's Black and Vodacom's VideoPlay - are forecast to grow more than six-fold to nearly 10 million.

Live streaming demand

"We're quite confident. The combination of MultiChoice's reach, Showmax and DSTV Now cutting-edge Internet television services will provide a unique and unmatched offering," said Patel.

DSTV Now is an app that allows MultiChoice subscribers to live stream channels on the satellite platform.

The company has invested heavily in infrastructure that allows it to beam television content since its launch more than 20 years ago.

Video via satellite is expected to remain at the heart of video entertainment for the majority of Africans for at least the next five years despite a rapid uptake of video on demand offerings from Internet streaming services.

The bulk of Internet users rely on mobile phones to connect but hardly use their data to stream videos because of the cost. In South Africa, for example, a 1GB data bundle costs around R149, a stiff price in a country where the minimum wage is R20 an hour.

The listing of MultiChoice is likely to fetch between 9 and 12 times its $627 million annual core earnings, or EBITDA, valuing it at least $5.6 billion, bankers and analysts said, making it a blue-chip Top 40 stock on the Johannesburg bourse similar in size to drug-maker Aspen Pharmacare.

"We endorse this decision. Naspers recently raised R140 billion, twice the size of MultiChoice, by selling 2% of Tencent and R33 billion from the sale of their Flipkart stake," said Byron Lotter, a portfolio manager at Vestact, which owns shares in Naspers.

"Historically, Naspers used the MultiChoice cash cow to fund new acquisitions. They no longer need the cash from MultiChoice."

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