Consolidation is a symptom of a tough economy and a changing industry. When the harsh reality of a market slump hits, it’s time to cut out the excesses eliminate unnecessary costs and duplications, focus on high margin areas, and create critical mass in the right sectors.
In the media industry, high margins mostly mean broadcasting assets, which explains why almost every media company wants to get its hands on radio stations or, if already in broadcasting, more radio stations. But the much-needed consolidation has not occurred in South Africa largely because of the restrictive regulatory environment.
Consolidation that never was
Two companies, New Africa Investments Limited (NAIL) and Kagiso Media, are the best examples of consolidation that never was.
In December last year, ICASA said no to a merger between the two groups by refusing to grant a concession to allow the combined entity to control more than two FM radio stations. So, the two were forced to walk away from the deal. Before that, Kagiso had also tried to tie up with Primedia, but that was called off because Primedia’s board was uncomfortable with incurring another R250 million in borrowings. Given the uncertainty at Primedia, Kagiso was happy for the deal to have been called off.
NAIL, on the other hand, is a unique media company in that it’s sitting with a huge cash pile (R600 million in cash at the end of June) that it wants to spend on media assets. Currently, its radio assets include controlling stakes in Jacaranda and KFM, as well as a 24.9 percent share of Kaya. Another radio asset is in the form of sales house Radmark, where it partners with Kagiso as a shareholder in the business.
NAIL and Kagiso also overlap in their shared interest in Jacaranda. Kagiso’s other radio assets are in East Coast and OFM, the latter controlled by Africa Media Entertainment (AME).
Apart from broadcasting, NAIL has various publishing interests (The Sowetan, Leadership Magazine), some film and television assets (Urban Brew, New Africa Films), and more recently ventured into outdoor advertising. The foray into outdoor quickly proved a good one for NAIL by the interim period to June, NAIL Outdoor and NAIL Outdoor Africa were contributing R3.6 million of headline earnings, or about a quarter of the earnings from its media interests. The contribution from radio was under half the total earnings from media during the six months.
Kagiso’s further assets include Exhibitions and some publishing interests in the form of Butterworth’s Publishers.
Both groups are currently trading under cautionary, meaning there’s something on the cards that could affect the price at which their shares trade on the JSE Securities Exchange. AME is trading under cautionary as well.
At face value, the cautionaries suggest a hive of corporate action. But we know from the fact that none of these are joint cautionary announcements, they’re not talking to each other. Rather, the industry currently seems to be going through a clean-up phase, with consolidation happening only on the fragmented fringe, for example NAIL’s purchase of Natanya, Randata and Significant Signs in the outdoor advertising market.
AME is an excellent example of that clean-up phase. The small company became saddled with debt of up to R80 million after the boom years of buying everything ‘media’ that it could get its hands on. It then brought in a number of turnaround specialists and eventually the strategy was settled on out of necessity, AME would sell most of the assets, pay off debt and focus on broadcasting. According to Kevin Coyle, the recently appointed CEO, AME would like to get its hands on another, preferably mainstream radio station.
Assets that remain within the AME stable include controlling stakes in Algoa and OFM, The Dome in Northgate and Foghound Studios. This is after numerous asset disposals, the most recent being the sales of Big Concerts and Penguin Films.
Although a small company, it’s been a hot subject largely because of the valuable radio assets and also because of the personalities involved. A consortium of shareholders led by musician Johnny Clegg tried unsuccessfully, although it was a close call to overthrow the AME board earlier this year. Their strategy was the same as that of the incumbent board; the only difference was that the Clegg consortium believed its members could better manage broadcasting assets. Another difference between the two was that the current board had empowerment grouping Worldwide, an investor in AME for many years, on its side. Worldwide threatened to walk away if the Clegg consortium were successful, which could have placed AME in a difficult position to fulfil any other radio aspirations.
Worldwide admitted that AME was a non-core asset , but said there was really no point in selling because of the low share price. Also, as Worldwide director Joe Makobe told me at the EGM, the investment started to make more sense when viewed alongside investments in Johnnic and MTN. Johnnic, like virtually every other media company in SA, has made its broadcasting aspirations known as well.
Do three cautionaries mean consolidation?
NAIL’s cautionary more than likely relates to the announcement of a significant strategic plan that was due in August, but has been delayed. The company has promised shareholders to detail what it plans to do with non-core assets such as its 60 percent stake in Hertz, and also how it plans to spend the cash pile wisely. NAIL has said that some of the cash could be paid to shareholders in the form of a dividend when it releases year-end results next March. But, for now, the cautionary most likely relates to the sale and/or restructuring of assets rather than any significant purchases.
What Kagiso’s cautionary relates to is anyone’s guess. After the failure of its deal with NAIL, CEO Roger Jardine said Kagiso was off the market until the regulations around broadcasting ownership had been relaxed.
AME’s current cautionary relates to the possible purchase of the assets, or business, of Stan Katz’s United Stations.
This all clearly implies that the South African media landscape is unlikely to undergo any significant consolidation in the near future. It will probably continue in a phase of clean- up and restructuring for some time. Unless, that is, ICASA manages to affect significant change in the broadcast environment at the impending review.