MultiChoice has bigger problems than technical insolvency

In its latest results, MultiChoice has fallen into technical insolvency, a serious concern. However, the media giant has even bigger problems, including declining subscriber numbers and poor capital allocation.

MultiChoice’s financial results for the year ended 31 March 2024 revealed it suffered a R4.1 billion loss and became technically insolvent.

Its assets declined to R43.9 billion, while liabilities increased to around R45 billion. This leaves it with a negative equity of R1.07 billion, which means it is technically insolvent.

A company is considered technically insolvent when its liabilities outweigh its assets. In other words, when the company has negative equity.

This means a technically insolvent company cannot settle all its liabilities if all its assets are liquidated.

Technical insolvency is not a death sentence. There are situations in which a company is technically insolvent but still able to meet its financial obligations. 

However, technical insolvency creates a situation where bankruptcy becomes a more likely outcome if left unchecked.

Notably, technical insolvency raises red flags for creditors like banks and suppliers. Therefore, they may become less willing to lend money or extend credit to the company because the risk of not being repaid increases. 

This can make it difficult for the company to obtain the cash flow it needs to operate.

If these red flags are enough to scare creditors into demanding immediate repayment, companies could also find themselves in a difficult position if they cannot make those payments.

However, Urquhart Partners’ Richard Cheesman told Daily Investor that the company has bigger problems to contend with, and technical insolvency is not a major concern for MultiChoice.

MultiChoice CEO Calvo Mawela echoed this sentiment, saying the company is not concerned about being technically insolvent and that it is part of the plan.

He said MultiChoice has liabilities they are accounting for, including “the put option that Comcast can do to us”.

They have decided “to say the investment that we have made in the tech division, let’s write it off completely so that we can clean up everything that sits with us”.

That means the increased liabilities and technical insolvency “was a delivery strategy on our side”. “To non-financial people, they will just see negative equity and get a shock,” Mawela told MyBroadband.

“But we have been in discussions with our lenders, and they are still comfortable with the underlying business,” he said. “They will only get worried they see the cash being burned, but so far, so good.”

Cheesman told Daily Investor that technical insolvency does not necessarily reflect the full state of a company’s financials and operations.

For example, Canal+’s potential takeover could inject fresh cash into the business, solving many of the company’s financial problems.

However, this acquisition faces many regulatory hurdles and is not a done deal yet.

Cheesman highlighted two concerns about MultiChoice that are more pressing than its technical insolvency – declining subscriber numbers and questionable capital allocation.

Urquhart Partners’ Richard Cheesman

Subscriber numbers

The poor performance revealed in MultiChoice’s latest results was partly due to a 9% decline in active subscribers, which included a 13% decline in the Rest of Africa business and a 5% decline in South Africa.

The company admitted that despite an expected decline in subscribers following a financial year that included the FIFA World Cup, it was not expecting such a sharp drop. 

DStv’s subscriber growth tends to be outsized during years with major sporting events as people sign up for their service to watch. This is particularly prevalent during football World Cup years. 

In turn, the year following a major sporting event tends to see muted subscriber growth and even a decline due to people unsubscribing as they no longer see a need to pay for the service. 

MultiChoice attributed the sharper-than-expected decline to a difficult macroeconomic environment and a consumer under increasing financial pressure. 

It also continued to blame load-shedding despite the intensity of power cuts reducing in the second half of its reporting period. 

“Despite the typical resilience of pay-TV in a downturn, many of our would-be customers cannot afford to consistently pay for our product or choose not to subscribe when power availability is unreliable,” the company said. 

DStv’s premium subscriber base was particularly hard hit, declining by 15% over the financial year from 2.7 million to 2.3 million subscribers. Its mass-market offering showed more resilience, with a 5% decline. 

Cheesman explained that the sharp decline in subscribers could be because the company worked off a high base following the Cricket and Rugby World Cups last year.

However, it could also be an indication of a bigger problem for the broadcasting giant.

To make up for lost subscribers, MultiChoice implemented significant cost-cutting measures, which allowed it to deliver R1.9 billion in cost savings against an initial target of R0.8 billion.

While this improved the company’s income statement, it required MultiChoice to cut its set-top box subsidies by R1.5 billion year-on-year.

Cheesman explained that this could have been part of the reason for the decline in subscribers.

The set-top box subsidies allow more people to become subscribers because there is a lower entry cost. Once these subsidies are cut, however, many potential subscribers will face a higher barrier to entry.

Cheesman said that if the company’s subscriber numbers continue to decline, it could threaten MultiChoice’s long-term sustainability.

The decline in DStv’s 90-day subscriber base across its business is shown in the graph below. 

Capital allocation

Aside from declining subscriber numbers, Cheesman said the company’s capital allocation over recent years has been a drag on the group’s returns.

Years of financial decline have seen MultiChoice look for growth opportunities wherever it can find them, resulting in an acquisition spree.

This has meant spending billions on projects that may not deliver sufficient returns, potentially leaving the company worse off.

MultiChoice has been looking for growth opportunities across the continent with a dwindling DStv subscriber base and mounting liabilities.

For example, it is pumping billions into Showmax, hoping to capture a large chunk of the growing African streaming market.

Many of MultiChoice’s investments – like the relaunched Showmax platform – could still bear fruit.

However, there are many investments that did not have the impact the company thought it would, costing it billions.

For example, MultiChoice’s investments in Kingmakers, Questar, and Bidstack have cost it large amounts without any return on investment.

It had to completely write down its investment in two of these companies – Questar and Bidstack – to nil. 

MultiChoice invested nearly R6 billion in Blue Lake Ventures, which was traded as BetKing and later changed its name to KingMakers.

This investment delivered extraordinarily poor results. For the 2023 financial year, it reported a loss of R500 million.

Daily Investor calculated that Kingmakers’ loss extended to around R850 million for the 2024 financial year.

Last year, MultiChoice said an increase in Nigeria’s discount rates prompted a R2 billion write-down in the value of KingMakers.

Kingmakers is currently recorded in Multichoice’s financial statements at R4.2 billion, far less than the company has invested in it.

Cheesman said that while some of these investments could still deliver an attractive return for MultiChoice, the company’s capital allocation track record is a valid concern for investors, as the results so far have disappointed.