Mid January 2003. The first real working week after the silly season and the media industry, like the rest of the country, sets a laid-back pace before the February onslaught. A rash of news activity prematurely interrupts the collective lie-in – Johnnic Holdings has hung a ‘for sale’ sign on its media assets. Turns out that Saki Macozoma, CEO of New Africa Investments Limited (Nail), is an interested buyer.
That weekend the Sunday Times, South Africa’s largest-selling newspaper and easily the most coveted of these assets, speculates that Macozoma’s bid has the support of Terry Moolman, the mercurial chief of CTP/Caxton, where Johnnic holds a sizeable equity stake. In the same piece there’s a line about ‘other bidders in the wings,” including a proposed management buy-out led by one Connie Molusi, CEO of Johnnic’s publishing arm.
Early March 2003. The ‘for sale’ signs are pulled down as none of the bidders can deliver on what media analysts peg as a R1,5 billion price-tag. In the middle of the month Johnnic Holdings puts out a press statement. Seems the company has given some thought to its strategy for unbundling its convoluted structure and realising shareholder value. It’ll be staying in media after all, retaining the 62,5 percent shareholding in Johnnic Communications (Johncom), controlling owner of brands such as Sunday Times, Business Day, Nu Metro cinemas and Gallo music. The aforementioned Molusi is named Johncom’s new CEO.
Molusi, according to the statement, is henceforth responsible for welding the ‘media, digital and entertainment operations [of Johncom] into a tightly integrated operation focused on growth in SA and Africa.” Johncom chairman Mashudu Ramano says the integration strategy has two goals: “To drive increased sales across the group products through enhanced cooperation between the business units; and to cut costs by centralising support and administrative functions.”
Quite a turbulent start to the year for the media industry; quite a task for the new chief. Given that much of the impetus for exiting the media space came from the National Empowerment Consortium (NEC), whose 30 percent stake in Johnnic Holdings still hasn’t been repaid (NEC raised the initial capital from institutional funders back in 1996), there is a lot riding on a successful restructuring by Molusi…shareholders, it seems, can be fickle.
‘The mandate from the board gave us the ability to deal with problematic businesses,” says Molusi of the holding company’s about-face. ‘In that process we’ve essentially wiped out our debt, we’ve sold some of the non-core assets, and we’ve sold the major part of the stake that we had in MTN.”
Significantly, Johncom’s debt, last year at R401 million, has been reduced to R54 million – largely as a result of that disposal of close on 16 million shares in listed cellular network provider MTN. Molusi also points to the sale of Hammicks, which was trading in an overcrowded UK book retail market, with less than ten percent market share. ‘We’ve exited it to value,” says Molusi. ‘We’ve also exited Music for Pleasure.”
Referring to his management imperatives, Molusi continues: ‘I’ve got a very simple philosophy. I’ve looked at the businesses and I’ve said where there are problems you either fix them, you sell them, or you close them. I think we’ve been quite successful in that. If you look at the business now it’s completely different, it’s quite focused.”
But focused or not, Johncom’s new look has yet to be reflected in the bottom line. Although the 2003 year-end financial report argues that this year’s figures aren’t comparable to previous years ‘as a result of the MTN Group unbundling,” the unavoidable reality is that the latest numbers aren’t Johncom’s best.
Moneyweb CEO Alec Hogg, in a post-results interview on Classic FM with Johncom’s financial director Prakash Desai, pointed out that the group’s ‘deconsolidated figures” (net profit minus the stakes in Caxton and MNet/Supersport) show a negative R20 million, against 2002 results that came in R7 million to the good. ‘Was it that tough a year?” asked Hogg.
Desai, acknowledging the effects of difficult trading conditions on the media industry in general, countered that ‘an effective tax rate of 57 percent,” arising out of the legacy of three separate listed entities (the entertainment businesses in Mega, the publishing operations in Times Media Limited, and the Johncom infrastructure), was what really hurt the group.
‘We had unproductive interest with the capital, the debt all sitting out at Johncom, and we’ve had businesses where we’ve been unable to offset profit and losses,” said Desai. ‘But at an ‘ebitda’ or profit from operations level, [there is] a significant turnaround.”
Ebitda (earnings before interest, taxation, depreciation and amortisation) is not an uncontroversial method for measuring corporate growth, and in this instance it of course excludes the 57 percent tax rate paid by Johncom, yet Desai has a point. The 2003 ebitda figure for the group shows an increase of almost 15 percent to R195 million, from R170 million last year. The largest contributor to group earnings are the newspaper and magazine publishing divisions, with ebidta of R99 million against the previous year’s R85 million.
Johncom’s digital division, after years of losses, has also shown healthy ebitda and the improvement of 111 percent translates into its first profit ever. But the filmed entertainment businesses, although growing by 23 percent, ended with negative ebitda – ‘due, in part, to continuing pressure from onerous leases at Nu Metro Theatres and Imax,” says Desai.
With the growth potential for the bulk of Johncom’s assets dependent on advertising revenue, Molusi is confident that the market has seen the bottom of the trough. He also points out that expected cuts in interest rates should boost consumer spend, a factor that would mainly benefit the group’s retailing (Nu Metro, Imax and Exclusive Books), music (Gallo) and home entertainment interests. Nevertheless, while it is the nature of these cyclical trends to turn, Johncom’s prospects for unlocking significant value in South Africa are limited. To that end the group is aggressively targeting the African continent.
‘In Africa filmed entertainment is almost non-existent, and where it exists it’s in a rather poor state,” says Molusi. Taking advantage of the gap, Johncom opened a multiplex cinema in Kenya last November and is looking to establish a presence in Nigeria, Ghana and Zambia. The publishing operations are exploring opportunities in Nigeria with MIMS and Struik Christian Books, and the digital division, as Molusi writes in the 2003 annual report, ‘already provides I-Net Bridge financial services in Namibia and learning opportunities, through eDegree, in Kenya.”
If Africa is to deliver growth that will satisfy the Johnnic Holdings board, Molusi needs the support of Johncom staff in ensuring that the anticipated revenue isn’t lost to complicated and expensive corporate structures. On this point, Molusi is adamant that integrating the group’s administration and management functions won’t compromise the uniqueness of the various divisions. Challenged with the example of AOL Time Warner, where employee displeasure at centralised control over distinctive media brands certainly contributed to the biggest losses in United States corporate history, the boss is carefully dismissive.
‘Johncom’s approach is completely different to AOL Time Warner’s,” he says. ‘Historically, the Sunday Times was managed together with the Rand Daily Mail, Business Day and Financial Mail. That changed a bit when Pearson’s came into the picture, but if we look at how the business units themselves are run, they’ve got completely separate editorial teams and therefore we are able to build a single title’s own internal culture. What we’re actually centralising is back-office functions. Why should you have different IT and human resource systems for a publishing company? It doesn’t make sense; those are shared services. Why should you have a differentiation in the infrastructure when you know a better utilisation of that infrastructure will drive your efficiencies?”
Why indeed. But Molusi is perhaps referring to the entertainment division’s relocation to the Rosebank head office, an integration move with potentially larger repercussions than consolidated software systems, when he continues with the AOL Time Warner comparison.
‘AOL Time Warner haven’t been able to bridge the gap between their entertainment and media businesses, and have even failed within the media businesses themselves. I say the approach [to consolidation] is not top-down. You’ve got to sell the idea and get people’s buy-in. The cultures are different. When you debate the issues, people have contributed to the solution. So the likelihood of finding competing personalities is minimised. I guess it’s about the substance of the model as well as how you build consensus.”
Johncom’s 2004 annual report will reveal how successful Molusi has been. With a market capitalisation of around R1,5 billion, analysts have suggested that the group is trading at a discount of almost R500 million to its net asset value. If that doesn’t change, Johnnic Holdings and the NEC might well consider another about-face.
Hogg’s Figures: Wrong?
As is sometimes The Media’s policy on contentious items, we sent this piece to Molusi for comment on facts and misquotes (not, of course, interpretation). Here’s his response to Moneyweb’s assessment of Johncom’s 2003 results:
‘The Moneyweb CEO incorrectly pointed out that the group’s figures excluded the contribution [of associates] showed a negative of R20 million contribution against the prior year positive contribution.
‘The error arises with Alec attributing the R67 million exceptional items to the operating group, whilst this is largely made up from the associates.
‘Prakash Desai, the group financial director, will attest that the profit from operations, excluding associates, improved 35 percent and the profit before tax and after exceptionals improved by 400 percent.”