Naspers no longer needs cash from 'risky' MultiChoice

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MultiChoice says it now competes directly with other video entertainment services and licensees.
MultiChoice says it now competes directly with other video entertainment services and licensees.

Naspers no longer needs money from pay-TV operator MultiChoice, which has admitted to facing several risks and uncertainties in its business.

Internet giant Naspers this week announced its video entertainment business MultiChoice Group will list on the Johannesburg Stock Exchange (JSE) on 27 February.

Last year, Naspers said it was planning to list MultiChoice separately on the JSE and simultaneously to unbundle the shares in the business to its shareholders.

This as the pay-TV operator is facing competition from the like of Netflix and other over-the-top (OTT) providers.

Historical cash cow

According to Byron Lotter, portfolio manager at Vestact Asset Management, historically Naspers used MultiChoice as a cash cow to fund new acquisitions.

"I can safely assume the money used to make the original Tencent investment would have come from your DSTV/M-Net subscriptions in the late nineties," he says.

Lotter notes that today MultiChoice has over 13.5 million subscribers across Africa. Last year, it had revenue of R55.5 billion and trading profit of R5.5 billion.

"The group estimate profit will come in at R6.1 billion this year. This business currently has some tough challenges ahead. The most obvious one is the streaming competition from the likes of Netflix. MultiChoice has launched its own streaming service called Showmax, which as a consumer, I must say has a great selection.

"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. They no longer need the cash from MultiChoice. This may also give them room to list elsewhere, which could unlock even more value," says Lotter.

David Shapiro, deputy chairman of Sasfin Securities, comments: "We've been big holders and supporters of Naspers on the strength of its investment in Tencent, paying little attention to any of the group's other businesses."

He notes Tencent overwhelms the size and potential of the other enterprises.

"I have nothing against MultiChoice. It's a good business and has done very well over the years, providing good quality viewing to its subscribers. But I have doubts about whether MultiChoice can meet its growth promises because of competition from streaming services."

Shapiro believes the answer lies in developing local content, but that means producing this content in all areas in which it hopes to expand.

"Can this really work? Remember Netflix is big on providing local content too. Sport is still an attraction but soon mobile providers will begin challenging DStv's service, as we're seeing around the world."

Brian Neilson, director of market analyst firm BMIT, believes by separately listing MultiChoice, Naspers wants to realise shareholder value for the undervalued MultiChoice asset, as most of Naspers' share price seems to be linked to its investments in Tencent.

This is a typical reason for spinning off a division, and both the parent and the subsidiary often perform well after this happens, he says.

Positive spin

Independent ICT analyst Charley Lewis points out Naspers will put a positive spin on what it is doing, and the listing may well provide excellent value for investors, as well as offering MultiChoice greater agility to respond to the challenges of the local market, including venturing directly as DStv into the streaming market itself.

According to Lewis, MultiChoice is under pressure on a number of fronts in SA. "The upsurge in FTTH [fibre-to-the-home] penetration is clearly making major inroads into the DStv market, since FTTH uptake is largely an affluent household phenomenon - the same consumers that subscribe to the DSTV premium offerings.

"The decline in premium DStv subscribers has been widely documented (the company has lost nearly 180 000 premium subscribers over the last two years, with premium subscriptions now accounting for only 14% of its total subscriber base), as has the uptake of FTTH-enabled streaming services such as Netflix."

Conversely, Lewis notes, Netflix's subscriber numbers in SA (which it does not report) are reportedly booming, with estimates closing in on half a million, and leading to Netflix now commissioning its own local content.

"It's a worldwide trend. Streaming services have already overtaken pay-TV in the UK; Netflix already has more subscribers than cable TV in the US, with surveys showing that streaming is overwhelmingly the platform of choice for young viewers."

Lewis points out MultiChoice is also under pressure on the regulatory and public relations fronts, as its overwhelming market dominance in the pay-TV market has been criticised by many quarters over the years, as has been its active derailment of digital migration.

"Its monopoly of sports rights is currently under review by ICASA, with regulations set to undermine DStv's exclusivity over sports of national interest, and thus to take away the other major draw card for premium subscribers."

Lewis believes the recent Competition Commission ruling that the SABC-MultiChoice deal be filed before the Competition Tribunal as a notifiable merger may well spell further trouble for MultiChoice.

Stiff competition

In its pre-listing statement this week, MultiChoice outlined several risks it is facing as a business.

The company says it now competes directly with other video entertainment services and licensees, including state-owned and private free-to-air broadcast networks and international OTT services for customers, programming, audience share and advertising revenue.

The group also competes with motion picture theatres, mobile network operators, gaming and other entertainment and leisure activities for general leisure spending, it notes.

"The group faces competition from global companies that deliver content to consumers over the Internet (including Netflix), often without charging a fee for access to the content (eg, YouTube), or charging a lower fee than the subscription prices charged by the group," MultiChoice says.

"Also in the rest of Africa specifically, various competitors have entered or plan to enter the video entertainment market. The entry of additional competitors using any of the existing and/or new platforms could impact and/or erode the group's video entertainment subscriber base."

MultiChoice is also concerned by the rapid rate of technological change and adoption of new technologies currently affecting the video entertainment industry.

Trends, such as the convergence of television, the Internet, mobile telephones and other media, have created an unpredictable environment, the company says.

It fears new technologies or industry standards have the potential to replace or provide lower-cost alternatives to products and services that are currently sold by the group.

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