New Africa Investment Limited (Nail) was driven to the wall by constant questioning of its empowerment credentials and management discord, a senior media analyst has suggested.
These weaknesses prevented Nail’s bosses from figuring out how to navigate regulatory restrictions that were ultimately a debilitating impediment, said Harold Bopalamo, analyst at Barnard Jacob Mallet.
Bopalamo spoke to the Mail & Guardian this week after Nail’s board announced it had accepted an offer from a Johnnic Communications-led (Johncom) consortium to purchase the holding company for R1,3-billion, or R10,66 a share.
Johncom had launched the bid in partnership with Kagiso Media and Caxton /CTP publishers and printers. The offer is subject to approval by shareholders, to whom the Nail board has recommended acceptance. If, or rather when, the deal is approved, it will bring an end to Nail’s colourful history.
A contentious feature of the group’s structure has been the Phaphama consortium’s economic ownership of less that 10%, matched by a 52% vote in the boardroom.
Nail’s last audacious bid for growth came early this year, when it tried to buy Johncom, before concluding that there were no suitably priced assets.
Then the hunter became the hunted.
The Johncom offer increased by 16c a share an offer of R10,50 a share from a consortium comprising Investec Bank, Safika Holdings, Tiso Private Equity Fund and the Mineworkers Investment Company.
Safika Holdings, a shareholder in Nail through Phaphama, is co-owned by Nail CEO Saki Macozoma. Macozoma has recused himself from the bidding process, but will vote as a shareholder when the Johncom bid comes to the table.
Bopalamo said it would make “the [consortium members] better companies”. And Investec gave a surprisingly objective and benign assessment of its rivals. Investec analyst Kevin Mattison noted: “The onus of extracting value from the deal lies with Johncom.”
Connie Molusi, CEO of Johncom, believes he will be the chosen suitor because “ours is the best offer to shareholders, since it does not involve asset-stripping, but returns value to them”.
In accepting the Johncom bid, Nail cited attractive pricing, timing of cash flows and options afforded to shareholders as the key considerations. Of the R10,66, R7,21 will come from distribution of Nail’s R640-million cash pile and proceeds from listed Nail interests in New Africa Capital, MTN and Johnnic. Nail values these at R389,7-million.
A further R3,45 a share will come from the sale of Nail’s media assets to the consortium. The Nail board has until the end of the year to dispose of non-media assets such as a 60 % holding in car hire company Hertz. The price fluctuation of the listed assets to be disposed of poses the greatest risk to Nail shareholders, and Bopalamo sees this as “creating a gap for a better bid from the Investec consortium”.
The most compelling reason for the deal to go through as proposed is that Johncom will hold on to the media assets and create value, while the Investec consortium intends to break them up and sell them on, some inevitably to Kagiso and Johncom, possibly at a higher price.
Bopalamo is impressed by the focus of Johnnic’s and Kagiso’s management talent, which is dedicated to the media industry. “They won’t sell and go to the mining or financial services industry,” he said.
He also applauded Johncom and Kagiso for doing the deal within regulatory constraints and for a “rare bit of succesful black-on-black cooperation”. Under current regulations, a media company with significant print interest cannot control a radio station, with control being a shareholding of 25% or more.
Thus Johncom, owners of the Sunday Times, Business Day and half the Sowetan Sunday World, cannot aggressively enter radio, the fastest growing medium, along with outdoor advertising, in terms of advertising spending . Molusi sought the mandate from his board 18 months ago to investigate opportunities in radio
For the moment, Johnnic will acquire 19,9% of KFM and Jacaranda 94.2 fm. Bopalamo describes this as a “low-risk entry into a lucrative market”. More critically for Johncom, though, the group will now get its hands on the Sowetan and the remaining half of Sowetan Sunday World.
For Kagiso, regulations forbid controlling more that two FM licences. Kagiso has interests in Durban’s East Coast Radio, Jacaranda and Ofm
It will now increase its interest in Jacaranda to 65,1% by gaining 22,6% from Nail. It will also hold 24,9% of KFM, with 19,9% of the station in Johncom’s hands, and a private equity house holding a 21,7% stake until regulations allow Kagiso to buy it.
Molusi expressed confidence that regulations will change in respect of cross-media ownership and the number of FM licences an entity can control. Kagiso will increase its holding in advertising house Radmark to 66% and acquire half of Urban Brew Productions. Together they will hold 50% of Nail Outdoor.
Industry watchers agree that Johnnic’s priority should be to turn the Sowetan around and to consolidate Sunday World’s growth. Both titles have taken heat from Naspers competitors in the form of the Daily Sun and Sunday Sun.
The Sowetan currently faces the conundrum of falling circulation and increasing readership. Molusi said he believes the title will give Johncom a foothold in the daily market. “We would like to derive efficiencies from our resources by having a seven-day cycle and a daily title aligned to the Sunday Times.”
Investec points to Sowetan’s falling circulation as its biggest concern with regard to the deal, which it expects will dilute Johnnic’s earnings in the short-term.
Asked whether the new concentration of ownership under Johnnic might compromise diversity Molusi noted: “We cannot surrender the English mass market to Naspers. To provide and sustain competition, you need long-term commitment and a strong balance sheet, which we have.” He added that separate editorial teams and editors with differing mandates ensure “diversity of opinion”.
Bopalamo believes Johncom’s and Kagiso’s empowerment credentials are essential in helping them to manoeuvre in the politically charged media arena. Johncom is controlled by the National Empowerment Corporation, while Kagiso is 44% owned by the Kagiso Trust. “The success of this bid will create a more robust and higher value media sector on the [JSE Securities Exchange],” Bopalamo said.