A done deal?

Posted On Friday, 17 January 2003 10:01 Published by eProp Commercial Property News
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Sale of Johnnic's publishing titles and cinemas likely to go ahead.

NU MetroThat Johnnic Holdings, the holding company which owns 62,5% of Johncom, will shortly sell its publishing and entertainment interests, which include Nu Metro, the Sunday Times and half of the FM and Business Day, is now accepted wisdom.

The sale of the assets makes commercial sense. Johnnic Holdings has been looking for a way to unwind its pyramid structure since the group first unbundled M-Cell (now MTN Group) out of Johncom two years ago. That process unlocked a value trap of R1,5bn. The value of Johncom up to that stage was based purely on the MTN stake because of the relative size and performance of the cellular company compared with the other more sluggish assets.

But value remains trapped, analysts argue. Johncom still trades at a considerable discount (R15,20/ share) to its true value (closer to R22 /share).

Johnnic also trades at a discount to its net asset value (NAV), possibly because the company is functionless. Jacob Modise, Johnnic's chief operating officer, says there are several options for cleaning up the structure, including distributing Johncom shares to Johnnic shareholders.

But as Meloy Horn, media and telecommunications analyst at Merrill Lynch, points out, the best deal for Johnnic investors is the cash value of Johncom. Selling Johncom should net a minimum R1,5bn at current market value. Deutsche Bank analyst Max Koep believes the group is worth at least R2bn which makes sense considering the NAV. A sale of Johncom would see Johnnic investors with a minimum of R1,3bn - after liquidating the debt - to distribute to shareholders, including National Empowerment Consortium (NEC) members.

This will clear the way for Johnnic to complete its restructuring and to collapse its pyramid structure - by distributing MTN shares to Johnnic shareholders.

There are several buyers for the stake, but the dark horse is Johncom's management. The FM has learnt from well-placed sources that Johncom's management, led by Johnnic publishing CE Connie Molusi and Johnnic Entertainment CE Paul Jenkins, has been working on a buyout. Management has been cagey about the deal. Last September, Molusi told the FM he was unaware of any moves by Johncom's management to take over the group. And last week, Jenkins claimed to be unaware of any deal, though he said if an opportunity presented itself he would consider it.

Finalisation may be a way off. No cautionary announcement has been issued, as would have happened if it were imminent. However, the FM has learnt that management's proposal is just about done. Talk is that Rand Merchant Bank will do the deal, possibly through private equity group Ethos. Ethos director Peter Schmid declines to comment. Several obstacles stand in the way, chief among them price, empowerment considerations, and buying out shareholders.

There are several reasons why the deal should be done. One is that the pyramid and value trap present a problem for the NEC, Johnnic's 'controlling' black shareholders who own 29% of the group. The special purpose vehicle they used to buy Johnnic Holdings in 1996 is linked to share performance and, unless the share is trading at more than R85, their shares belong effectively to their funding institutions if they can't come up with the cash to pay for them. Cleaning up the Johnnic structure would help them.

Previously, there was concern that collapsing Johnnic into MTN would hurt the group's empowerment status. By maintaining the Johnnic Holdings pyramid, the NEC also effectively controls Johnnic's two subsidiaries, Johncom and MTN, thus ensuring the groups' empowerment status. But the 2002 year-end MTN deal solves that problem. Now disposing of Johncom would allow Johnnic to collapse its holding structure and become a pure telecoms company without losing its empowerment status.

Here's how: the new group through which MTN management has bought 19% will be a black group. That means 19% of the cellular group will be black. If Johncom is sold and the MTN shares distributed to Johnnic shareholders, then the NEC's 29% share of Johnnic Holdings would become about a 10% direct interest in MTN, bringing black control of the cellular group to just under 30% - considerable for a group the size of MTN.

The NEC would almost certainly approve a deal that sees Johnnic collapsed into MTN. The strongest individual group in the NEC is WorldWide Africa Investments - led by chairman and CE Phutuma Nhleko - which controls about 10% of the NEC's 28% in Johnnic Holdings. Nhleko has always been interested in telecommunications. Now that he is CE of MTN, it would make sense for him to steer WorldWide towards a direct stake.

Swapping Johnnic shares for MTN shares would also make sense for the other NEC members who in 1996 bought 33% of Johnnic through a special purpose vehicle with the financing terms linked to share performance. The share is trading at nearly R40 less than the breakeven point for the NEC.

MTN shares could be more attractive to the NEC than its interest in Johnnic. It seems that Nhleko is focus ed on growing MTN's earnings and cutting costs while trying to bring in new business and additional revenue. Also, there will probably be no new expansion by the group that requires serious capital cost. And one funder of MTN management's purchase of the 19% from Transnet - the Public Investment Commission (PIC), government's pension fund - will be paid back partially through dividends. MTN must reinstate a dividend policy.

All these factors combined should drive up MTN's share price. Also, as profit of the Nigerian operation increases and the group's high gearing falls, its rating should improve. This makes MTN shares more attractive to NEC shareholders.

However, buying Johncom will present some challenges. Cost is one, R2bn is a lot of money by any standards and that assumes a buyer is willing to pay the premium to trading price.

The question is how management is going to make money out of a deal like that. If the company were delisted, the group would have access to earnings and cash flow to repay the loan. But most private equity houses would not look at returns of below 20% and prefer about 30%. Johnnic Communications has sluggish returns on capital, just a little more than 12%. Though this is better than most others in the sector, an interest-bearing fixed investment would give a better return . But the management, particularly Molusi, has improved the group's historically bad margins and operating income over the past 16 months.

The other potential obstacle to a deal is empowerment. Johnnic's shareholders know that its media assets must be sold to a black group, for political and commercial reasons. Johncom management has talked to the ANC and may well have a blessing for the deal. But to get that it must have included an option to either bring in another black group or promote broad-based empowerment through a staff share scheme.

There are also commercial empowerment reasons. Technically, Johnnic's businesses are not part of a regulated industry, such as broadcasting, and don't need to be owned by an empowered company. But Johncom owns 24,5% of pay-television operator M-Net/SuperSport. Though the M-Net licence was issued before the birth of media regulator the Independent Broadcasting Authority (IBA), which is now part of Icasa (the Independent Communications Authority of SA) and thus does not have empowerment requirements, the pay-television channel will probably have to meet those obligations soon. Johncom, which has a stake in the pay-television group, is effectively the empowerment partner of Naspers, which controls the rest of M-Net/SuperSport.

The other commercial reason for Johncom to retain its empowerment status is radio. Johncom wants to get into radio, a high-margin business. Maintaining its empowerment status is important if it is to play a role in a freer broadcasting environment expected next year. Johncom says its management (including junior management) comprises 47% historically disadvantaged individuals.

The other complication is Caxton's Terry Moolman. Johncom controls 44% of Caxton, which is worth more than R1bn. Buying the group, delisting it and selling Caxton's stake would make the deal more attractive, even if a premium were paid for the Johncom shares.

However, Moolman's control of Caxton is through a pyramid structure that could be adversely affected by Johncom's disposing of Caxton. The FM has learnt that Moolman may have a say in Johncom's sale of Caxton.

Last modified on Tuesday, 29 April 2014 12:14

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