FREE TO READ: Sagarmatha: a stillborn unicorn
Its listing drew scorn, but does the investor community understand its business model? And should they have faith in it?
Sagarmatha Technologies, and its media partners, including Business Report, may have a point when they say SA investors are still coming to terms with the concept of a multisided platform (MSP) business model.
Sagarmatha controls African News Agency, online retailer Loot, Independent Online and Sagarmatha Enterprise Solutions. Proceeds from the group’s failed listing would have been used to buy Sekunjalo Independent Media, which controls Independent Newspapers.
Before its listing on the JSE was scuppered by its failure to submit financial statements on time, Sagarmatha was eyeing a market valuation of R49.7bn, which would have thrust it firmly into the JSE’s top 40 index.
However, those lofty ambitions drew scorn from the investment community and the media, though Iqbal Survé-led Sagarmatha and its allies hit back, saying its business model was misunderstood.
"It is apparent that there is a general lack of understanding around MSPs in SA," Business Report said shortly after Sagarmatha’s listing was halted by the JSE.
"This lack of insight shows in how the JSE’s largest company, Naspers, trades at a substantial discount as compared to the value of its investment of Tencent in China," the publication reported, in what can be construed as a rare stand in solidarity with its larger rival.
While the mechanics behind Naspers’s discount are far more complex than that — for one, the Internet holding company has outgrown the local bourse — some analysts say Sagarmatha is not wrong in that regard.
There are few examples of publicly traded MSPs globally, let alone in SA. The MSP business model refers to platforms such as Uber, Airbnb and eBay that simply provide a means for two distinct types of customers to interact and transact.
"The statement that SA investors are not that familiar with it as a business model-slash-concept is probably truthful because it’s not on our investment horizon," says Just One Lap founder Simon Brown.
Investors focused on local stocks will know Naspers’s Takealot and Flipkart businesses, but few other examples exist.
"Even in the US, Airbnb and the other big names are as yet not listed. So I think it [MSP] was a phrase that was probably not on most people’s radars, [my own] included," says Brown.
But he says successful MSPs "are an investor’s dream", as they provide platforms and let users do the rest, to put it in the simplest of terms. As Business Report claimed, these companies can generate huge margins.
"The challenge, of course, is that you’ve got to have critical mass, and that critical mass is [huge]. Uber has spent a fortune, as have Airbnb and many others," Brown says. "So it’s easy to talk the talk, but it’s a lot harder to get the traction and actually make it happen."
Uber is yet to turn profitable — and other ride-hailing platforms have fallen by the wayside — while even the likes of online retail giant Amazon took a long time to get into the black.
Jeff Bezos created Amazon in 1994. It turned its first quarterly profit in 2001, though steady profits came much later than that.
Brown, like others in the industry who spoke to the Financial Mail, is baffled by Sagarmatha’s outlandish valuation metrics, which are understandably based on sales numbers rather than profits, as the business is still loss-making.
"Truthfully, the valuation was absolutely a stretch at best, at more than 100 times sales," he says.
The group was essentially asking investors to "angel-invest in some of their businesses" that had no track records.
For instance, Video360 — Sagarmatha’s answer to YouTube which launched in September 2017 — has barely any users.
While the platform has a solid user interface and decent algorithms running in the background, Brown asks why users would choose it over YouTube.
"The ‘build it and they will come’ approach is just not always true. You might build it and nobody comes," says Brown.
Even online shopping platform Loot, one of Sagarmatha’s more established units, is by no means dominant in its space, where barriers to entry are extremely low, given that almost anyone can start a website. Loot also competes with Takealot and global giants such as Amazon.
Further, Brown says Sagarmatha’s plans to become a pan-African "unicorn" are extremely ambitious, as operating across 54 jurisdictions brings numerous difficulties — even for online players.
Brown says Sagarmatha’s prelisting statement reminded him of initial public offerings on the eve of the dot-com bubble.
"Back in those days, you could cobble almost anything together and slap big valuations on it.
"And with respect to Sagarmatha, it made some of those 1999/2000 listings look tame by comparison. That R50bn valuation would have taken it straight into the top 40 with very little in the way of underlying assets."
US-based Redwood Valuation Partners, which said Sagarmatha’s valuation of R39.60/share was justified — partly because of its acquisitive ambitions — did not respond to requests for comment.
Survé, meanwhile, has slammed the media’s coverage of Sagarmatha, saying in a statement that Independent’s competitors are trying to stifle competition and keep the media in white hands.
"The collusive and vigorous attempt to pummel Independent Media and Sagarmatha Technologies into submission is reckless in the extreme," Survé says.
"These attempts have put at risk the employment of thousands of people and are deplorable.
"Their objective to deliberately disrupt the commercial viability of Independent Media is both deceitful and devious."