What are we to make of the purchase by Jimmy Manyi through his shelf company, Lodidox, of the Gupta-owned media assets? Well, just on the information given by Manyi himself, the whole thing should fail, and fail quickly, because the whole transaction, on the information available, is a scam. What remains is to speculate as to what the exact nature of the scam is and what clues we can look out for to make a sensible determination. By DIRK DE VOS.
The basic facts are these: The Guptas are selling their stakes in Infinity Media, the majority owner of ANN7 and TNA Holdings, the publisher of The New Age newspaper, to a shelf company owned by Manyi for R450-million split R300-million for their ANN7 stake and R150-million for The New Age. The purchase price is to be funded by Oakbay via a loan it advances to Manyi’s company.
Manyi has sought to wrap the whole scam, with the complicity of Collen Maine’s ANC Youth League and other associated carpetbaggers, in the colours of “Black Excellence”. There is nothing excellent about it. For a start, Manyi lacks credibility, is incompetent and has no experience running a media businesses. One can’t but help feel desperately sorry for those who make great efforts in promoting, showcasing and celebrating real black excellence. Manyi does have some relevant experience that would explain his new role. For some time now, he has played his part in the propaganda campaign for the Zuma faction and the Guptas on social media, particularly on Twitter.
Let’s look at the assets themselves. A print newspaper and a TV news channel, both “old media” operations and launched into a competitive but shrinking old media landscape. The New Age doesn’t publish circulation figures so nothing can be verified but this national paper has a claimed readership of around 150,000. Early reports suggest that many copies are immediately pulped. It does not really serve any purpose to explore this charge because the best claimed readership is around 153,000 (there is a big difference between circulation, the number of copies sold, and the number of readers). The Sowetan, for example has a readership of well over a million. The New Age’s readership is somewhat similar to the regional Free State-based Volksblad and the KZN-based Witness newspapers.
What The New Age does have is support of government and State-Owned Enterprises. A recent amaBhungane report citing research from market research firm Nielsen suggests that this might be a much as R42-million per annum. Very little comes from the private sector because The New Age doesn’t disclose verified circulation figures. Now if a R150-million vendor must be repaid over, say, 10 years at an interest rate of 10%, debt servicing costs alone would be R24-million per annum or half of its revenues. Looking at the rest of the newspaper sector, operating profit margins (i.e. before debt servicing or interest charges, depreciation and tax) are well below 10%. Naspers’ Media 24 is at 6.8% . Making the assumption that half of operating profit can go into debt servicing and assuming a 10% operating profit margin, a newspaper with R150-million of debt to pay will need to generate revenues of R480-million per annum. It is hard to see how The New Age, even with its poorly paid journalists, even breaks even operationally, much less pay any indebtedness off.
ANN7 is perhaps a worse asset. A 24-hour television news, no matter how poorly it is done, is an expensive undertaking. The leading 24-hour television news service in South Africa is eNCA. Its viewership is bigger than all the other 24 news services put together. Its parent companies don’t disclose too much about eNCA as a stand-alone operation but they reported operating profits of R216.5-million in 2015. No doubt eNCA benefits from sharing news gathering and other resources resources with its e.tv sister company. A big chunk of eNCA’s revenues, probably between R400-R500 million per year, is from Multichoice itself. The balance of revenues would be traditional advertising.
The big unknown is whether Multichoice pays ANN7 anything and if so, how much. Its viewership is a fifth of eNCA’s and falling. There has been a campaign to get ANN7 kicked off the DSTV platform but Multichoice insists that it has a contract. Naspers, Multichoice’ parent company, under political pressure with digital migration issues, its de facto pay TV monopoly and less than kosher deals with the SABC for its library archives, is not going to want to rock the boat or tell its subscribers what the deal with ANN7 is. However, Manyi has to repay R300-million. Again, over 10 years at a 10% interest rate, this amounts to repayments amounting to R50-million a year. It doesn’t stack up and it can’t. ANN7 almost certainly loses money.
So, why do these assets exist and what is the purpose of vendor-financed sale of them to Manyi? The answer to the first part of the question lies in the special place that traditional media businesses still retain. The print media, which came to include journalism done on radio and television, is also known as “the Fourth Estate”, almost as if it was another distinct arm of government. The press enjoys special privileges in democratic constitutions. James Madison, author of the First Amendment to the US constitution, guaranteeing freedom of expression and the press, wrote, “The advancement and diffusion of knowledge is the only guardian of true liberty.” Thomas Jefferson, another US founding father, remarked, “The only security of all is in a free press.”
Before the internet and mass digitisation of production processes, the news business was fairly orderly and profitable. Most people relied on one or two sources for all their news, and barriers to entry for mass circulation papers or broadcast television were fairly high. The mainstream print and broadcast media provided what appeared to be all the information we needed and their mass audiences could be profitably sold to advertisers. Accelerating technological transformation through digitisation and the internet has undermined the business models that have kept them afloat. Even the most powerful titles in the world are under enormous pressure in an environment where there has never been more content available for no direct charge just a click away.
Yet, for all the developments in internet-based media brands, old media formats, the physical newspaper, the television station (even if transmitted via satellite) and the radio station have maintained a prestige, reach and audience that online-only publications, with a few notable exceptions, have failed to do yet. Even as they struggle with declining ad spend, print newspapers can still charge perhaps 5-10 times more per reader than their equivalent online version. Traditional media forms in news and opinion still have a voice and influence that most stand-alone online versions can’t yet match.
Now, if one wants to launch a potentially viable media title doing journalism today or even just do opinion-forming as a start-up, having it all work entirely online is critical, but it will be a long, hard and highly uncertain undertaking. If, on the other hand, you wanted to be in the business of opinion forming, have a voice and influence as quickly as possible and not be too concerned about financial viability, buying or setting up a newspaper and a television news channel is still the best way to do this. Understood in this way, the Guptas’ decision to set up the New Age, ANN7 and to try to get their hands on Independent Newspapers makes sense. Digitisation of production processes means that setting up a new newspaper of TV channel is not as capital-intensive as it once was.
Neither The New Age nor ANN7 were set up to be viable media operations. The return on investment is measured using completely different criteria: to what extent do these media titles provide the Guptas with a voice and influence for them and their patron, President Jacob Zuma, to provide sufficient cover for their main project – state capture and the wholesale looting of the fiscus. When combined with an online and social media strategy, hatched by PR firm Bell Pottinger, the investment can be said to have produced fabulous returns. The returns are hard to measure but one estimate is that the Guptas plundered as much as R100-billion.
What about the sale of the assets then? Operating these businesses without having anyone prepared to offer banking services must be tough. If Manyi and Co are to be believed, 500 people have to be paid their salaries every month. Perhaps, too, the Guptas must be thinking about cutting loose. December is not so far away any more. Maybe they feel it is the beginning of the end for them. But the R450-million vendor-financed deal is genius in a way. It provides the Guptas several attractive options that they don’t yet have.
Although Manyi has gone out of his way to ingratiate himself with the Guptas, one never knows with people who might change their mind as things get tough. Manyi’s career is an object case in a lack of principle. By offering to sell their stake for R450-million, the Guptas have someone stupid enough to accept the commercial terms but super indebted to ensure that he sticks to the pre-determined script. The whole transaction reads a bit like those 419 scams out of Nigeria. The 419 invitations to do “business” are intentionally stupid because the scammers only want to hook the most gullible, greedy and stupid types and not waste their time engaging anyone who is sensible or just sceptical. The 419 scammers need to clear away the astute. The suckers select themselves.
The Guptas will have to continue to pitch in funding to keep the whole show afloat and should they want the assets back at any point or hand them to some other fool, they can simply call upon their unpayable loan. If the whole thing collapses anyway, as is likely to happen, then Manyi is on the hook for charges of reckless trading that unpaid employees and suppliers are likely to bring.
The selling price tag does carry some risk for the Guptas though. While it is not clear whether Manyi’s company is acquiring the shares held by the Guptas in Infinity Media and The New Age Holdings or re-organising to acquire the underlying assets directly, the R450-million price tag probably creates a significant capital gains tax liability. Getting around SARS and Reserve Bank rules though has been what the Guptas have done best. It appears SARS CEO Tom Moyane has their back. For now.
This brings to attention another option for the Guptas. Provided these businesses do not lose too much money a month, the R450-million debt becomes an excellent way to launder the proceeds of crime. Additional funding to The New Age and ANN7 on top of anything else they can get in the form of advertising spend can be converted into legitimate seeming repayments of the vendor loan. Perhaps if the loan is ceded to a UAE-based company the applicable withholding taxes can be paid, but then again, as we have seen, the Guptas don’t concern themselves with paying any type of tax.
The fate of The New Age and ANN7 is far from certain and not many will mourn their almost certain demise. They were set up in pursuit of an illegitimate purpose and will disappear in equal illegitimacy. Just how it all plays out remains to be seen. DM
Dirk De Vos runs a corporate finance and advisory firm in Cape Town.
Photo: Then Government Communication and Information System CEO Jimmy Manyi addresses government Communicators Forum (GCF) conference held in Centurion on 14 November 2011. Photo: GCIS