The acquisition of the South African subsidiary of Independent News and Media (IMNSA), now known as Independent Media, last year by a Senkunjalo-led consortium has been the subject of a good deal of speculation, mostly in media circles. The antics of Dr Iqbal Survé, Independent Media’s executive chairman since he took over the reins, has done nothing to dampen the speculation. These have included some high profile firings, and the departure of several respected and senior journalists but it goes further: there are the regular public spats with other media houses.
There’s this one, published by BDLive and notably, this one on YouTube. Then there is his rather batty Twitter account @IqbalSurvé and of course the amount of doting coverage he gets in his own publications.
With so much going on around the person of Survé, the rather interesting question of the original purchase price, R2-billion, and the way in which this has been funded has been lost. It is hard to get a grip on the new shareholding of Independent Media but it appears that the main shareholders are the Sekunjalo Independent Media consortium (SIM) with and the Government Employees Pension Fund (GEPF), acting through its authorised representative the Public Investment Corporation (PIC)) and two Chinese state owned companies. SIM itself is divided into two main empowerment groupings that include trade union investment companies, an assortment of black and women’s business groupings, development trusts and the Umkhonto WeSizwe veteran’s trust. Prominent named individuals, besides Survé himself, include Mandla Mandela and Sandile Zungu. Exactly which entities provided what type of funding is not clear.
The type of funding arrangements typical in many BEE consortia transactions is that the funder, in this case the PIC (using GEPF funds), funds the debt element, its own shareholding but also the largest portion of the BEE consortium’s shareholding. The linked shareholding may well be a mechanism whereby the PIC in this instance has a call on the SIM shares as security for funding the purchase of these shares by SIM. It would not be unfair to say then that the GEPF is the source of most of the funding for the acquisition. Assuming that the Chinese investors are funding at their own risk, it would be surprising if the GEPF’s total exposure is less than R1.5-billion.
Put another way, the GEPF will bear most of the losses if this investment does not work out. This has potentially important consequences: The GEPF is a huge pension fund with over R1.2-trillion under management. It is different from other pension funds in that it is not subject to the Pension Fund’s Act, neither it is supervised by the Financial Services Board. Instead it is governed by the Government Employees Pension Law.
It is different in other respects also. Most pension funds are of a ‘defined-contribution’ variety in which members carry the risk of failed investments. The GEPF is a defined-benefit fund. This means that the government, as the employer, must make good any deficit to the fixed pension amount owed to government pensioners. Any shortfall must be made good by the government and therefore the obligation falls to the country’s taxpayers. Increases to pensions above the rate of inflation do depend on the performance of the PIC in managing these funds. Although whatever exposure the GEPF has to Independent Media is small in its total portfolio, it is still worth asking whether the Independent purchase can be justified on any commercial basis.
One must also take into account that it is not just the R2 billion purchase price but the additional R1.2-billion due to be invested in the next six years to, in the words of one of Independent’s staff writers, “put the company squarely ahead of its competitors”. If we are to believe Survé, the Sekunjalo consortium will stump up R400 million with the balance of R800 million from two international banks. It is not clear here whether this further extends the PIC’s exposure, whether through additional debt or through the provision of guarantees. It was reported that there are other unexpected liabilities that include a R257-million unfunded exposure, related to a medical aid liability and a contingent tax liability of nearly R141-million.
There are several reasons for concern. At the outset, Survé is new to the media business and did/does not know much about how it works – on his own version. An interview with him printed in Business Report shortly after the acquisition reveals that he had a tenuous grip, at best, on the way that the media works and where it might be going. Nothing suggests that there has been any learning since then. The PIC, though, ought to know how the industry works as they are a large investor in both Naspers and hold as much as 21% of Times Media Group (TMG).
What is the state of Independent Media when it was acquired? It was not good. This much is clear from a detailed submission made by the Media Workers Association of South Africa (MWASA) to the National Treasury in 2011 on a Treasury discussion document entitled ‘A review framework for cross-border direct investment in South Africa’. It is a worthwhile read. Using available information, MWASA was able to show that for a total acquisition cost of between R560-million to R725-million from when IMN plc first acquired a 31% stake in the then Argus group in 1994 to the full acquisition and delisting of the renamed IMNSA in 1999.
Since IMNSA became a full subsidiary, MWASA makes the credible calculation that the cumulative operating profits up to 2011 and available for repatriation to Ireland, have been in excess of R4-billion. Operating profits margins squeezed out during that time regularly exceeded 20%. During this time, the South African group was sucked dry by its Irish parent company. While it once employed over 5 000 people, there were less than 1 500 employees in 2011. Very little was invested and little in the way of new titles were launched (interestingly, the two titles that did get launched, the Cape based Daily Voice and the Zulu language Isolezwe have been star performers). Assets disposed of include the outdoor advertising company, formerly Clear Channel, and several prominent properties. The Sekunjalo-led consortium took control of a company depleted of its assets and capacity by its former failing and relentlessly cash hungry Irish parent.
It might be worthwhile developing a view on another valuation. The R2-billion acquisition price looks way too high. An inspection of the Irish based Independent’s own 2014 financial statements, shows that it carried the IMNSA investment in its books at roughly R800-million. The transaction for R2-billion was another cracking success for them. It must have been very satisfying to sell a company which has had its neck wrung for many years and to do so at such a handsome premium.
PWC does regular research into the media and entertainment sector in South Africa and in its most recent report it says that in 2013, the South African newspaper sector generated revenues of just under R11-billion per annum, R8.2 billion from advertising and the balance from the cover price. The magazine sector, consumer and trade titles generated about R8.2 billion with R4.9 billion coming from the cover price and R3.3 billion from advertising.
Besides Independent Media itself, there are three other large media companies with substantial presence in print media. It is interesting to look at each of them.
Naspers, through its Media 24 division, owns 72 newspaper titles through its print media subsidiary, Media24. This includes the Daily Sun. The success of the Daily Sun is extraordinary. The Daily Sun’s daily circulation figures are bigger than the combined figures of all the remaining daily newspapers. Naspers also publishes Die Burger, Beeld, Volksblad, Son and The Witness, as well as Sunday papers Rapport, City Press, Sunday Sun and Sondag Son. Naspers provides a rough segmental analysis of its Media 24 division and this is the worst performing part of this media giant. Of total revenues of under R12-billion (R11.69 billion) disclosed in its 2014 financial results to 31 March 2014, for this division, earnings before interest, tax and depreciation was just under R1.1 billion (R1.073-billion), an operating margin of 9.1% and trading profit (total profit as if it were a stand-alone entity) was around R600-million or 5%.
Caxton with 103 titles, mostly community knock and drops, has the largest number of newspaper titles but it also owns the national daily The Citizen During 2013 Caxton invested in its printing operations, with printing presses installed at its Johannesburg, Cape Town and Durban facilities. In the most recently published annual financial report for Caxton from revenues of just under R5.9 billion its operating margins for the year ended 30 June 2014 was 7.9% down from 11.5% in the previous year. Caxton’s business model is different from other media houses because a large part of its revenues are from physical printing including many titles from the Times Media Group and most of the Independent Media titles.
The Times Media Group publishes more than 20 national, regional and community newspapers, the largest title being The SundayTimes. Its stable includes SundayWorld, The Times, The Sowetan, Business Day, The Herald and the Daily Dispatch. It has not yet released its full to June 2014. TMG has recently undergone a restructuring to refocus the business but in its latest financial results, its media division generated R1.917-billion in revenues making an operating profit of R162-million or an 8.4% margin, slightly better than it achieved in the previous year.
The last full year figures publically available for Independent Media are those when it was still Irish owned in 2012 referring to its performance in 2011. Total revenues in 2011 were R1.84-billion (€184-million). In 2013, the year in which IMNSA was sold, profit margins had halved from the preceding year’s 20%+ to just under 10% (9.6%).
From the above what is clear is that operating profit margins for mass circulation print media companies cannot exceed 10%. Once the costs of financing of modest re-investments in existing operations, tax, depreciation and other similar charges are brought into account, it is hard to see that the returns available for distribution to shareholders can be more than 5% of annual revenues. Based on this, the valuation placed on Independent Media is significantly higher than the market places on its listed peers and the premium grows even higher if the announced committed additional investment is made.
What we do know is that newspaper circulation is under severe pressure with the latest Audited Bureau of Circulation showing a fall of 7.8% but there were big falls in some of Independent’s titles such as the Pretoria News (a fall of 28.3% from an already low base), the Saturday Star (a fall of 15.2%) and Johannesburg daily, The Star (a fall of 16.9%). The longer term shows that other than Isolezwe, the rest of the titles in the group are under severe pressure with declining circulation. PWC takes the view that prospects for growth in advertising revenues will be seen in locally distributed, free newspapers and in newspapers targeting the bottom end of the market. Independent Media lacks something else – a really big circulation title like Naspers’ Daily Sun or TMG’s Sunday Times.
Further, the sector will continue to see modest growth in advertising spend but it ought to be clear now that digital or online revenues, although growing significantly, are still a rounding error on the overall picture and that newspapers targeting the top end of the market will not be rescued by online advertising.
Neither is it likely that the government’s own media budget could come to the rescue despite “heroic” efforts to do just this for TNA’s national The New Age newspaper. A little while back in 2011, Jimmy Manyi, heading up the Government Communications Information System (GCIS), threatened to use what he estimated to be a R1-billion annual budget to government-friendly media. It is hard to determine the size of total government adspend. The GCIS’s own 2014 figures state that its previous total annual budget for all media was R253 384 284, a quarter of the amount suggested by Manyi three years prior. The Media Development and Diversity Agency’s (MDDA) 2014 report on transformation in the media, citing an article by Louise Flanagan, says just R53.8-million was spent by the GCIS on print media with the balance going primarily to broadcasting.
That means R2 billion is a lot of money to spend on a business that is arguably in the worst position compared to its competitors. It is almost impossible to have any conviction that the money spent will render anything like a prudent investor’s return. For now, one is left to speculate what the thinking behind this might have been. Perhaps someday in the future, the PIC will be called upon to provide us all with an answer. If Independent Media continues to lose circulation, that day could be sooner than we think.
Dirk de Vos runs a corporate finance and transaction advisory service, QED Solutions, out of Cape Town. It is mostly involved in ICT, media, telecoms and renewable energy. Follow him on Twitter @DirkdeVos.