We all instinctively understand this investment nugget – you gotta pounce when something is undervalued. Sometimes expressed as ‘buy low, sell high.’ Could this be what’s happening with Multichoice (DStv) and Canal Plus? Let’s talk about it.
Canal Plus is the largest shareholder in Multichoice with a 31.67% stake. That’s no longer good enough for Canal Plus who now want to own 100% of the company.
Canal Plus is offering to pay about US$1.7 billion for the 68.33% stake they don’t currently own. That’s a rather generous offer, they tacked on a 40% premium to entice current shareholders to sell. Which means Canal Plus values Multichoice at about $2.5 billion.
On Wednesday, the day before Canal Plus made the offer, Multichoice shares were trading at R75 a pop. Canal Plus offered to buy out the other shareholders at R105 a share. Should be a tempting offer for the other shareholders because you don’t happen upon 40% gains that often in capital markets.
After hearing about the offer, the share price of Multichoice rose. By the end of yesterday, Thursday, the share price had reached R95. This increase was likely due to investors purchasing Multichoice stock in anticipation of cashing in once Canal Plus finalises its offer.
The offer is not solid yet. Canal Plus said the offer is not binding but is an indication that they are carrying out their due diligence and will table a binding offer once that’s done.
You could look at the 40% premium, which is just a 10% premium now that the share price has risen to R95 in the wake of the offer and think it is generous but it really is a low offer.
I imagine Canal Plus knows that the R105 won’t be accepted but you know how negotiations go, you start with a very low offer, so that you can increase it later to what you were actually willing to pay. This way, the target feels like they have successfully negotiated a better deal.
Here’s why I believe Canal Plus is low-balling. Multichoice has had a challenging few years which include:
- Recessions and economic challenges across the 50 African countries it operates in. Which in turn led to low growth and loss of subscribers in some markets as people could not afford DStv anymore.
- Power challenges in important home market of South Africa which led to many cancelling subscriptions. The same power challenges affect other African markets, something Zimbabweans understand all too well.
- Increased competition from streaming services like Netflix and Disney+, with YouTube becoming a formidable opponent too. Then there is Openview in their home market also delivering serious value with their zero dollar subscription offer.
A tough few years
As a result, Multichoice has not been performing all that well. Multichoice reported a 5% drop in half-year profit in 2023. 90-day active subscriber numbers fell 2% but it was worse in South Africa where subscribers fell by 5%.
To blame were weaker currencies in several markets, losses at Showmax and a lower contribution from its home country.
Then also we should consider that the previous six months had the World Cup and that there was a subscriber spike linked to that. It was only natural that there would be a drop in subscribers.
Multichoice’s streaming service was a bright spot, registering a 13% increase in subscribers and 46% increase in revenues. However, like most other streaming platforms that was not enough for Showmax to post a profit. Losses actually increased from R300m ($16m) to R800m ($43m).
It is not surprising that Multichoice’s share price has decreased over the past year then. See, Multichoice’s share price reached about R130 in 2020 and although there were fluctuations, it stayed above R115 for the most part.
In fact, between October 2020 and May 2023, the lowest it got to was R105, sometime in 2021. That’s the R105 that Canal Plus is offering today, calling it a premium.
In March 2023, the Multichoice share price reached it’s highest at R147 a pop.
The share price fell below the R105 mark in May 2023 and got to as low as R63 in November when the half year results which showed the loss we talked about was reported.
So, if you look at what happened in 2023, you can consider the R105 offer by Canal Plus a good one. However, if you look at Showmax’s growth and the fact that overall group revenue rose 4%, premium customers in South Africa rose 5% then you’d believe the shares are undervalued right now.
Vultures circling the drain?
I think Canal Plus expects to see disappointing results for the full year 2023 which will likely lead to the share price falling. I am sure the other investors know this as well and so the R105 may be fair after all. Especially for those not willing or confident enough to wait for Multichoice to turn it around.
Think of the shareholder who bought these Multichoice shares at R147 less than a year ago in March 2023. How pessimistic does he need to be to believe cashing out at R105, a loss of R42 a share is the prudent decision?
Especially when you consider that Multichoice recently launched SuperSportBet, an online sports betting site. Gambling could prove to be a lucrative business and so why would one accept the R105 that Canal Plus is offering.
Hence why this feels like vultures circling the drain. Even South African analysts believe the R105 price “materially undervalues the group”.
We shall see how the whole thing plays out.