After its unbundling by holding company Johnnic earlier this year, media group Johnnic Communications has become one of the most eligible maidens on the stock exchange.
The problem is, the cost of its lobola has screamed up over the past two years. Johncom’s share price is up 28% since its unbundling in March and this sets the bar that much higher for any potential suitor. Despite the nearly four-fold increase in share price to R44 since 2001, analysts believe it is worth up to R57 — another reason why so much talk of a deal is in the air.
A number of possibilities are on the cards, though no deal is likely to get the nod from institutional shareholders unless black empowerment is somewhere on the horizon.
The three empowerment titans — Cyril Ramaphosa, Tokyo Sexwale and Patrice Motsepe — are reportedly keen to lead an offer for 35% of Johncom which, at the current market value of R4,7-billion, would cost them about R1,6-billion. They would have to bring in smaller empowerment players to avoid charges of enrichment. Sexwale’s Mvelaphanda Holdings has made it clear it wants to expand into media, and Ramaphosa, as chairperson of former parent Johnnic, has an intimate knowledge of the industry. Johncom chairperson Mashudu Ramano, who also heads African Legend Investments, would be a logical inclusion in a black economic empowerment (BEE) deal.
Then there is Caxton and CTP Publishers, in which Johncom has a 38% stake. It has about R1-billion in cash and more on tap, so it could conceivably make an offer for part, or all, of the company, though it would have to include an empowerment element.
Caxton has long-standing ties with Johncom. It prints and distributes various of its titles, in addition to publishing a number of its own papers and magazines, such as The Citizen, Bona and People. Institutional shareholders would like to see Caxton cement an empowerment deal of its own rather than piggy-back on whatever transaction Johncom eventually concludes.
Sunday Times reported Johncom’s chief executive Connie Molusi saying it made sense for Johncom and Caxton to merge parts of their businesses to give them critical mass in a consolidating industry. Caxton’s strengths are in printing, publishing and distribution, Johncom’s are in publishing.
A further possibility is a management buyout, though Abdul Davids, senior analyst at Allan Gray, says this may be difficult: “A management buyout requires a lot of cash, which Johncom doesn’t have at the moment.” That’s not to say management and key staff might not be included in any empowerment consortium being put together.
Institutional shareholders say while they expect the media group to announce a black empowerment deal in the near future, they are still waiting for the dog-and-pony show that typically precedes such deals.
That’s when potential consortium members get introduced to major shareholders and spell out their credentials and plans for growth. “We’ve had various BEE groups come and sound us out about the possibility of a deal, but nothing in the last few months,” says Coronation analyst Gavin Joubert.
Allan Gray speaks for more than 30% of Johncom, either through direct holdings in its portfolios or as an advisor to clients who hold Johncom shares. Coronation holds about 15% of the shares.
Johncom’s media assets include the flagship Sunday Times, 50% of BDFM (which owns the Financial Mail and Business Day), Sunday World and Sowetan, and various other papers and magazines. Other brands include Nu-Metro, Map Studio, Gallo and Exclusive Books.
Revenue for the financial year to March 2005 climbed 52% to R4,1-billion, while headline earnings were up a whopping 134% to R405-million.
Coronation estimates that Johncom’s media interests account for about 21% of net asset value (NAV), with nearly three-quarters of that coming from the Sunday Times. About 39% of NAV is derived from its Caxton shareholding and 28% from its interests in M-Net Supersport.
The fortunes of Caxton and Johncom’s media interests are linked to the advertising cycle, currently booming as consumers continue to binge. Joubert says the Sunday Times has a loyal subscriber base that leaves it less vulnerable to market downturns.
M-Net Supersport’s strong subscriber base also protects it against economic downcycles, which analysts say gives Johncom a defensive quality during softer economic cycles.
Davids says the streamlining of Johncom under Molusi and deputy chief executive Prakash Desai makes it easier to do an empowerment deal at the operational level, focusing on the media division. Caxton and M-Net Supersport may then tie up separate empowerment deals, even if the same empowerment partners are involved. This is the model followed by Standard Bank/Liberty and Old Mutual/Nedcor/Mutual & Federal, which strung together a series of deals involving many of the same empowerment partners.
Empowerment deals based on the issue of new shares at the holding company level have the effect of diluting existing shareholdings, hence there may be some pressure on Johncom to do a deal at the operational level.