Naspers spins off Multichoice

As Michael alluded to earlier, Naspers will be spinning off Multichoice early next year. This is a significant move from a management team who are seriously trying to unlock value after a lot of pressure from shareholders.

Historically Naspers used the Multichoice cash cow to fund new acquisitions. I can safely assume that the money used to make the original Tencent investment would have come from your DSTV/M-Net subscriptions in the late nineties.



Pay television arrived in SA in 1986 (the year I was born) when M-Net was launched by Naspers. In 1993 Naspers created a subsidiary called Multichoice which was to manage M-Net as well as the hardware behind the services such as decoders and satellites. In 1995 DSTV was launched which had about 20 channels including SuperSport, ESPN, SABC, Cartoon Network, CNN and MTV. In 2000 DSTV expanded into sub-Saharan Africa and some of the Indian Ocean islands (I remember watching a Springbok game in Bali on SuperSport in 2009). In 2003 dual view was launched and in 2005 the first PVR decoder was available, 2008 saw the first HD channels and in 2011 BoxOffice was launched. Thank you Wikipedia.

Today Multichoice has 13.5 million subscribers across Africa. Last year it had revenues of R55.5bn and trading profits of R5.5bn. The group estimate profits will come in at R6.1bn this year. This business currently has some tough challenges ahead. The most obvious one is the streaming competition from the likes of Netflix. Multichoice have launched there own streaming service called Showmax, which as a consumer, I must say has a great selection.

The other big challenge is sport. Live sport is massive and growing. It is the best form of reality television, and it never gets old. The problem for Multichoice is that the rights to these leagues and events are priced in Dollars, Euros or Pounds. Subscriptions they charge are in Rands and other sub-Saharan currencies, which have mostly depreciated in recent years. You can only access Sport through the premium subscription because the other channels actually subsidise the costs of bringing the British Premier League, La Liga and Serie A to our screens. I do feel however that streaming sport is the future and I know Multichoice will be well aware of this. I am sure they are biding their time until they launch a proper pay per stream service.

So what about valuations? Let's be conservative and give the business a 12 times profits valuation. That would value the business at R73.2bn. Multichoice would be in the league of Bidvest, Mediclinic, Redifine and Mr Price. Still a sizeable business. Phutuma Nathi shareholders will end up with 25% of the business so there will be some form of dilution. As a Naspers shareholder, you will receive Multichoice shares which at this valuation will trade at around R150 a share. A decent value unlock considering that the whole of Naspers traded at R150 a share in 2009.

We endorse this decision. Naspers recently raised R140bn (twice the size of Multichoice) by selling 2% of Tencent and R33bn 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.