Sagarmatha’s castles in the air
Iqbal Survé’s latest undertaking is long on ambition, but short on reasons for savvy investors to part with their money
What a wonderful story it would make: an African Amazon, or an African Tencent or even an African Alibaba. Who of us wouldn’t love that to be possible?
Sadly, it’s not. And no amount of wishing or business school cut-and-paste sloganeering will make it so.
Being sceptical about turning a collection of loss-making and insolvent media and Internet businesses into "an integrated multisided platform ecosystem in Africa that knits technology platforms, content creation and distribution and e-commerce into a consolidated value proposition aimed at attracting prime customers for monetisation" doesn’t inherently make someone an Afro-pessimist.
It’s unlikely, at this stage, that even a well-resourced entity with a proven record in Europe, Russia, Brazil, India or Australia could usurp the dominance of the US Internet giants. Unless, that is, the US government were to decide to break them up in the interests of increased competition and fair elections.
China, as in all things, is different. Realising early on how important the Internet is to politics and economics, it banned Facebook, Twitter, YouTube, Google and Amazon, creating space for Chinese champions. Remarkably, despite this protection, in most cases these Chinese champions provide superior offerings.
But back to the real world of Africa in 2018, and companies with resources and proven track records. Sagarmatha Technologies, a company owned by Iqbal Survé’s family trust, has seen the "multisided platform" future of media and says it wants to create an African champion based on this vision. So it has invited selected investors to subscribe for a private placement of shares, at R39.62 apiece, ahead of a JSE listing. It’s targeting a minimum of R3bn and a maximum of R7.5bn in the placement, giving it a R50bn market cap. The listing will be abandoned if the R3bn figure isn’t reached.
Sagarmatha has staggeringly grand plans for the money, expanding into a long list of technological fields by buying 15 unnamed companies and implementing all manner of ambitious intentions. Indeed, the danger is that, with so many plans, Sagarmatha won’t be a well-resourced entity even if it were to get that full R7.5bn. And there’s even less available when you consider that R1bn of the proceeds will be used to repay debt. (Just ask Naspers CEO Bob van Dijk how easy it is to leak billions in this business.)
And then there’s the matter of a track record. Ahead of the listing, the most substantial asset in the Sagarmatha collection is Independent Media, controlled by Survé’s Sekunjalo Independent Media (SIM) with a 55% stake. (The Public Investment Corp, or PIC, holds 25% and a Chinese consortium 20%.)
The prelisting statement represents the first opportunity, since Tony O’Reilly’s Independent News & Media bought out the minorities and delisted Independent Media in the late 1990s, for the public to see exactly what’s going on at one of the biggest print media groups in the country.
It’s not a pretty sight.
Back in 2013, when Survé’s funders coughed up R2bn for Independent Media, they must have known they were buying a struggling business in a dying industry. Despite all SIM’s talk (in 2013) about building an African champion, the Sagarmatha prelisting statement reveals how sharply things have deteriorated in five years.
Operating profit at the news operation edged up from R131m in 2014 to R142.6m in 2015, but then crashed to a loss of R319m in 2016. In each year, the cost of repaying the hefty debt pushed the overall bottom line deep into the red — a R60.4m pretax loss in 2014, an R89.7m loss in 2015 and a R548m loss in 2016. In the six months to June 2017, the pretax loss was R141m.
Yet the collapse in profit did nothing to deter Survé from rewarding himself generously: he was paid R13.3m in 2016, up from R5.6m in 2014. This might grate investors who will have noted the potential R52m that Survé and some associates are set to pocket, should the full R7.5bn be raised for the listing.
But the point is that it’s not exactly a stellar record for an entity looking to lure investors to back what is essentially a list of intentions combined with a load of possible acquisitions.
In the prelisting statement, the overview of Sagarmatha Technologies’ existing business sectors refers to its "intention" 21 times before going on to describe the "acquisition pipeline". It is these intentions and acquisitions (the "value proposition", in business school jargon) that are meant to convert the unspectacular loss-making and insolvent Sagarmatha assets (plus loss-making Independent Media) into a cash-rich listed company with a market capitalisation of R50bn, if all goes according to plan.
Presumably it is these "intentions and acquisitions" that Redwood Valuation Partners said justified a valuation of R39.60/share.
Sagarmatha ticked all the boxes, according to the JSE, which insisted on an independent valuation and that a minimum of R3bn be raised.
Andre Visser, the JSE’s general manager of market regulation, says the exchange cannot take a view on whether a transaction is "good or bad", or if it’s based on "quality assets".
"We need to make sure that there’s proper disclosure — that the company meets the basic entry criteria and provides all valid information to investors," he says.
In the end, says Visser, investors must decide. "If the view is that the assets aren’t of a quality nature and you’re not prepared to invest, then it’s ultimately an investor’s decision."
The JSE’s legal counsel, Louis Cockeran, adds: "We would be on very dangerous ground if we decide whether an investment is a good or a bad one. It’s not for us to express any type of view on that."
Survé describes Redwood as "one of the world’s most-respected valuation firms". Perhaps the fact that few here have heard of this world player is a sign that SA is an out-of-touch mining town. Redwood did not respond when asked if its valuation was based on desk-top analysis or whether it had visited the country.
Either way, the timing isn’t great for a company that needs investors to suspend disbelief. The proposed listing comes in the shadow of the Steinhoff and Resilient debacles, ringing in the ears of investors who can still hear the Oakbay skeletons rattling in the background.
Right now institutional investors are not in the mood to give anyone the benefit of the doubt. They know they are being closely watched by clients wary of them pouring good money after bad.
The PIC, which invests government employees’ pensions, is also under close scrutiny. It lost a small fortune on Steinhoff (an estimated R17bn) and has little room to show continued favour for the whimsical ambitions of self-proclaimed African champions.
This leaves Chinese investors as the most obvious backers for a Nepalese-named African-based fourth industrial revolution story. Or perhaps the funds will be found in more "asset restructuring" within the wider Survé group.
*This story was written prior to the announcement that the JSE had pulled the plug on Sagarmatha's listing.
*Ann Crotty was involved in an effort to secure a 25% stake in Independent Media for employees ahead of the sale by the Irish. Additional reporting by Giulietta Talevi.