Seacom’s multi-million losses and plummeting book value analysed

Seacom has incurred large annual losses, and its valuation has plummeted since it was launched in 2009, but the company said there is more to its finances than profits and valuations.

Seacom was launched in 2009 and was Africa’s first submarine cable system along the continent’s Eastern and Southern coasts.

It broke Telkom’s monopoly in the submarine cable market and helped to bring affordable uncapped broadband to South Africans.

Seacom gained tremendous support after launch, but it was not long before cracks started to show in its business model.

Many competing cable systems, including WACS and EASSy, launched, causing international connectivity prices to plummet.

Seacom was forced to look at new revenue streams, including launching IP VPN, Internet, IP transit, ethernet and IPL offerings that compete against its wholesale clients.

The company faced a backlash from its large carrier customers, who signed long-term agreements with the company.

Its clients raised concerns about anti-competitive behaviour, and there was a growing risk of alienating their existing customers.

Although Seacom acknowledged competing against its wholesale clients posed a challenge, it continued to move up the value chain with new products.

Today, Seacom has a full suite of ICT products, including connectivity, cloud, and security solutions for small, medium, and large enterprises.

It has even created a consumer ISP WonderNet to launch fibre-to-the-home services, competing against Afrihost, Axxess, and Mweb.

Seacom’s finances

Seacom is a private company, and initial funding for the $375 came from a few sources:

• $75 million from the developers.

• $150 million from private South African investors.

• $75 million as a commercial loan from Nedbank.

• $75 million from Industrial Promotion Services (IPS) – an arm of the Aga Khan Fund for Economic Development.

Over the years, the shareholding changed. Seacom is currently owned by the Aga Khan Fund (40%), Remgro (30%), Sanlam (15%), and Convergence Partners (15%).

Remgro’s annual reports provide a window into Seacom’s finances and tell a tale of a company with mounting losses and a declining valuation.

Over the last eleven years, Seacom recorded a total net loss of R283 million. It was only able to turn a profit three times since launch.

The company’s book value, the present value of its assets minus its liabilities, plummeted from R2.9 billion in 2010 to zero a decade later.

The intrinsic value, a measure of value based on the expected future earnings, declined by R1.4 billion over the same period.

It is unclear why Remgro wrote down Seacom’s book value to zero but kept its intrinsic value at around R3 million.

It may be that Remgro wants to maintain a relatively high intrinsic value for a potential future sale of its Seacom share.

The charts below provide an overview of Seacom’s financial performance since its launch. All values are in R million.

Seacom explains

Seacom’s chief sales and marketing officer, Steve Briggs, told Daily Investor that the plummeted book value and significant losses arise from complications arising from the technical accounting requirements for a business of Seacom’s nature.

“The poor finances relate to a decision taken at a time to not incur the cost of revaluing the main assets annually but to rather depreciate them,” Briggs said.

It is coupled with the consequence of the indefeasible right of use (IRU) sales made by the business, which require raising a deferred revenue balance.

He said, as such, the net profit does not reflect the positive annual free cash flow generation of the business, which is the metric the Seacom board tracks.

“The book value of the assets also do not reflect their market value,” Briggs added.

Significant losses and declining valuations raise the question of whether Seacom’s shareholders benefitted from investing in the company.

Briggs explained that Seacom’s shareholder returns are a function of valuation plus run rate dividends. 

“Seacom has been a regular payer of material dividends as a consequence of its cash profits,” he said.

“Shareholders are comfortable with the return-on-investment (ROI) on their investment.”