MultiChoice’s Phuthuma Nathi (PN) share swap looked like an offer that was designed to fail. But because of the stamp of approval from the company’s board there was a risk that a large chunk of the shareholders might have assumed it was a good deal.

As it happened, only 5.8% of PN shares were exchanged for MultiChoice Group (MCG) shares — that is an acceptance rate far off the 20% level targeted by the board. It is testament to the ability of PN shareholders to spot a bad deal no matter who’s promoting it.

This puts them well ahead of shareholders in ordinary listed companies, who tend to vote blindly in support of any resolution presented to them at a shareholders’ meeting.

In a way, the low acceptance rate demonstrates just how successful the 13-year-old scheme has been. Much of MultiChoice’s promotional advertising for its broad-based BEE scheme — which has more than 90,000 black shareholders — has focused on how the dividend income from the shares have been used to fund education. The PN shareholders’ appropriately dismissive response to the offer suggests that investment in education has paid off.

Craig Gradidge of Gradidge-Mahura Investments agrees that the take-up was low. "Given the valuation it’s unsurprising that so few people did accept the offer, in fact I’m surprised anybody took it up," says Gradidge, who knows more about BEE shares and schemes than most.

The PN scheme is regarded as one of the most generous BEE schemes in the country. PN shareholders have received R92 in dividends since they bought the shares for R10 apiece in 2006. Much of that dividend was paid out after funding for the scheme was paid off in 2014 and reflects the ex-growth and cash-rich position of MultiChoice SA. By contrast, MCG is guzzling cash to fund growth across 49 African countries, which means less for dividend payments. The need to fund African growth also means the strong flow of dividend payments from MultiChoice SA is unlikely to slow down in the foreseeable future.

PN’s initial 20% stake in MultiChoice SA was topped up to 25% when its parent MCG was listed on the JSE in February following its unbundling from Naspers. The increase to 25% was part of an undertaking MCG gave at the time of the unbundling; another part of that undertaking was that it would offer PN shareholders an opportunity to swap into the more easily traded MCG shares.

The PN shares are listed on the Equity Express Securities Exchange and can be traded only between qualifying black shareholders. Gradidge says this substantially limits liquidity and genuine price discovery and explains why the PN shares trade significantly below their full value.

The generous dividend policy alone justifies a PN share price of R200, far north of the R109 at which it currently trades.

A key determinant of the success — or, as it happens, failure — of the swap was the rate at which the shares were to be exchanged. MCG was offering PN shareholders 0.97 MCG shares for each PN share up to a maximum of 20% of the PN shares held.

One of the many analysts critical of the deal said the exchange rate was based on the "undervalued" PN share price and essentially locked the BEE shareholders into that low value.

Mustaq Brey, CEO of empowerment group Brimstone Investments, which is a significant holder of PN shares, acknowledges the generosity of the PN scheme for those who invested in the early days but says the MCG board handled the swap badly. It wasn’t just the low value placed on the PN shares that bothered Brey; the closing date for the offer was days before MCG’s financial 2019 results were due to be announced.

"They were asking us to make a decision without the most recent numbers and wouldn’t explain why the swap was being finalised in a closed period," says Brey, who adds that communication on the part of MCG executives on PN has been poor. Another thing that irked Brey was the fee charged on the exchange. Nevertheless, as an investment company, he felt the illiquidity of the PN shares obliged him to take up the offer.

MCG FD Tim Jacobs, who points out that the exchange rate had to be fair to two sets of shareholders — PN shareholders and those with ordinary MCG shares — says the board is happy with the response. He says only a small proportion of PN shareholders wanted a liquidity event but that the vast majority weren’t interested. "In that context the take-up was reasonable," Jacobs tells the FM.