How MultiChoice’s B-BBEE restructure will happen

After just over 13 years, Phuthuma Nathi shareholders will be given the opportunity to enjoy the freedom of an unrestricted share in the form of MultiChoice Limited shares (albeit in terms of just a small percentage of their current shareholding).

This is because a key part of Naspers’s unbundling of MultiChoice – and its subsequent listing on the JSE in February – was that the broad-based black economic empowerment (B-BBEE) retail scheme would get a bonus share issue capped at 5% of the issued share capital of MultiChoice. Although this should be viewed as cause for celebration, one can’t help wondering if this is a little too late, as the heydays of MultiChoice seem so far behind it.

Background and context

MultiChoice was the first pay-TV operation to be launched outside of the US. Its first broadcast was in 1986. It has since grown to be the leading video entertainment operator on the African continent. With a presence in over 50 countries and over 15 million subscribers, the company is a television entertainment juggernaut.

In compliance with its operating licence with the Independent Communications Authority of SA, MultiChoice launched its B-BBEE retail scheme Phuthuma Nathi 1 (PN1) in 2006, wherein 16.7 % of the issued share capital was sold to black individuals and groups.

An additional 8.3% of issued share capital was later sold in a second B-BBEE retail scheme called Phuthuma Nathi 2 (PN2). This brought together 25% in direct shareholding by black people in the company.

In terms of returns, the scheme can be considered one of the most successful B-BBEE retail schemes ever implemented.

• Capital growth: The initial investment per share was R10. It is currently trading at R112. That represents a 10 times multiple on the initial investment.
• Cash flow: As a result of the underlying investment performance of MultiChoice, the scheme (which was funded initially by debt with vendor financing from MultiChoice and equity cash contribution) was able to repay its obligation and return cash flow to its investors. The reported internal rate of return exceeded 30%.

Even with all this success, a large criticism of the scheme has been its evergreen nature, whereby Phuthuma Nathi shares can only ever be traded among black people.

The impact of this on shareholders is that although the structure is debt-free, has minimal operating expenses, and almost all dividends declared are forwarded to shareholders, the lock-in means there is a perpetual discount in the trading value in the scheme’s share.

In addition, Phuthuma Nathi doesn’t have similar trading volumes as a result of the restriction to trade among black people only, unlike MultiChoice and its holding entity Naspers, which are highly liquid.

Transaction structure

The restructure of Phuthuma Nathi will be executed in the following manner:

• Step 1 : Merger of Phuthuma Nathi 1 and Phuthuma Nathi 2

This involves a simplification of the current PN structure, whereby PN1 will acquire the entire issued share capital of PN2. PN2 will therefore become a wholly-owned subsidiary of PN1 and will be delisted from the Equity Express Securities Exchange (EESE). PN1 will continue to be listed on its own exchange. The combination of the PN entities will result in one listed entity with a single share price. If one looks at a share trading website, PN1 and PN2 sometimes have different share prices, which can be confusing to both existing and potential shareholders.

It should be noted that the transaction is still subject to PN1 and PN2 shareholders’ approval at a shareholder meeting on October 21, wherein a suite of special resolutions is needed to give effect to the above.

• Step 2: Phuthuma Nathi and MultiChoice

The share exchange allows existing Phuthuma Nathi shareholders holding a minimum of 10 shares to exchange a maximum of 20% of their shares for MultiChoice Group shares. The exchange ratio is based on a 90-day volume-weighted average price for MultiChoice Group on the JSE and Phuthuma Nathi 1 on the EESE. Considering that PN is trading cum dividend, the ratio of 0.97 MultiChoice Group shares for every one PN share will be applied.

The impact of the share exchange will result in MultiChoice acquiring up to nine million ordinary shares in PN1 and up to 4.5 million ordinary shares in PN2. Up to 13 095 000 MultiChoice ordinary shares are in consideration for participating PN shareholders.

It should be noted that PN shareholders will be liable for the brokerage costs to implement the transaction, decreasing the allocation to 0.957 shares.

The share exchange offer opened on September 25 and the results will be released after October 28, when the offer closes.

Way forward

Regardless of the return expectation, one can say it is far better to have a tradeable asset than a restricted asset, which is what the Phuthuma Nathi share is in a nutshell. It would therefore be wise for Phuthuma Nathi shareholders to take advantage of this opportunity.

In looking at the underlying investment, the economic and growth outlook for MultiChoice has changed vastly since 2006.

The years of consistent double-digit growth in revenue and subscribers are long gone. For the first time since inception, MultiChoice faces credible competition in the form of online video-streaming services such as Netflix and Amazon Prime. The competition has dented its highly lucrative premium subscription numbers, which have declined by well over 300 000 in the past two years.

Read: MultiChoice: Emancipated or abandoned?

However, MultiChoice’s maiden financial results in March 2019 declared revenue of R50 billion and trading profit growth of 11%. One can safely assume the company has enough traction to remain a viable going concern for a very long time.