The soul of wit
17 December 2017 06:18 (South Africa)
Opinionista Dirk de Vos

Payouts, Facts and Profits: Odd media threesome share an uncomfortable bed

  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions (qedsolutions.co.za) out of Cape Town.

This week, three stories emerged in the media, which when put together, deserve closer scrutiny.

First, there was the reported settlement reached on the steps of the Labour Court, between former Cape Times editor, Alide Dasnois and that newspaper’s publisher, Independent Media.

It was all rather odd. Dasnois appeared to get everything she would otherwise get from a labour court and takes the view she is vindicated and claims her victory for all journalists. Independent Media then goes ahead and in its newspapers, claims its position was vindicated. Dasnois, for her part, is not taking this lying down and is contemplating further action for the slur. The issues of editorial independence and what that means have been widely discussed but there is a more basic problem: the credibility of any reporting in Independent Media newspapers. Shorn of this credibility, what possible value could they have for readers or advertisers?

The second story is a class action lawsuit launched by Solidarity against the Government Employees’ Pension Fund (GEPF). Solidarity claims that the GEPF unilaterally changed the formula for determining pay-outs. Solidarity claims that the GEPF has admitted that while it was not entitled to change the formula, it is too cumbersome to change it back. Tough luck then for those expecting different, higher payouts.

The third story is the Public Investment Corporation’s (PIC) presentation to Parliament’s portfolio committee on finance. The PIC manages the GEPF’s investments. It is hard to underestimate the importance of the GEPF in the South African set-up. It is one of the 10 largest pension funds in the world with an investment portfolio of R1.85-trillion. It is the largest single investor, by far, in companies listed on the JSE Securities Exchange. In large JSE listed companies, it is often the largest single investor. It also has a portfolio, representing 30% of its value in unlisted assets, both in South Africa and abroad. JSE disclosure requirements allow us to track the PIC’s performance for those investments, the unlisted part is much harder and this came under the spotlight in parliament. Of particular interest was the GEPF’s exposure to the investment in Independent Media.

It is important to understand how the GEPF is set up. Unlike private pension funds that are regulated by the Pension Funds Act and regulated by the Financial Services Board, the GEPF is governed by its own legislation, the Government Employees Pension Law of 1996. How this all came into being is described by Stuart Theobald, editor of Business Day’s Investors Monthly and head of research at Intellidex. The GEPF is different from other pension funds in other ways too. For the most part, pension funds are of defined contribution nature, the monthly contribution is set but the benefits or returns depend on the performance of the underlying investments. The GEPF is a defined benefit fund. Members are supposed to get a minimum guaranteed pension indexed against inflation. If there is a deficit and government employees are not able to be paid their minimum guaranteed pensions, then the taxpayer has to make up the difference.

There is some discretion though. If the GEPF outperforms and the actuarial calculations justify it, there is scope to increase benefits above inflation. The inflation formula determines the starting pension but increases above that are based on the assets/liability ratio. A “subject to affordability” clause may see benefits fall below inflation provided they are caught up later, either via better fund performance or a future taxpayer funded bailout.

There is another important difference between the GEPF and other pension funds. Pension funds are independently managed for their members and not their employers so they determine their own investment policies. The GEPF determines its investment policies acting in consultation with the Minister of Finance. For the present, the GEPF has a four-pillar investment policy, three of which are typical and what one would expect to see. The fourth, describes a development agenda that seeks to promote enterprise development, black economic empowerment and job creation but in doing so, it still seeks a return. The critical role of the Minister of Finance to preserve the GEPF’s integrity, especially in respect of prospective investments promoted by the politically connected, relying on the fourth pillar, should be obvious to everyone.

So what do we make of PIC CEO Dan Matjila’s explanations to the parliamentary committee about the investment in Independent Media? There are a number of grounds for grave concern. The recent history of the former Argus group of newspapers has not been a happy one. Essentially, when it was first acquired by its former Irish owners in the mid 90’s for between R560-million and R725-million, it was bled dry by its failing Irish holding company. Some estimates show that as much as R4-billion in cumulative profits were repatriated back to Ireland until 2011. While it once employed 5,000, there were fewer than 1,500 employees left in 2011. The real kicker for the former Irish owners came when they sold the depleted asset to the Sekunjalo-led consortium for a reported R2-billion, more than double the amount the former Irish owners valued Independent Media on their own balance sheet.

What we know from Business Day Journalist, Carol Paton is that R888m was committed to the transaction. Ms Paton also reported 70% of this “sat on the balance sheet of Independent Newspapers in various instruments, while 30% was a direct loan to Sekunjalo”. We also learn that the motivation for the investment is to create a black media giant like Naspers as it is only “fair we should give blacks a chance to create a Naspers”.

Let’s unpack all that a little: The PIC knows or ought to know how the media business works. It has long been a significant investor in Naspers itself. It was also a significant shareholder in the Times Media Group when it was listed on the JSE. Naspers has been a fabulous investment for the PIC but not because it owns newspapers. Naspers’ performance is as a result, first, of its dominance in pay television and more recently, its own investments in online media, notably Tencent in China. PIC ought or should have known that the newspaper industry has been facing declining circulation figures, the migration of advertising spend elsewhere and operating margins that are either razor thin (if well managed) or negative. Of the three main newspaper companies, Independent is in the worst position of them all. Other than Isolezwe, all titles are in decline, a trend that has not reversed. Let us remind ourselves too that the GEPF’s money is not actually on Independent Media’s balance sheet – it was paid to the former Irish owners, it is a debt owed by Independent Media to the GEPF and it is hard to see how it can ever be repaid.

Almost every significant new media business over the last decade or so has emerged from the online space. Newspapers are something that billionaires that have made their money elsewhere do for reasons not necessarily related to investment returns. An investment in a tired old newspaper business is exactly the wrong way to give black business a chance to create another Naspers. The 1970s, when this argument might have worked and when Naspers was a newspaper business and publisher, is now four decades in the past.

What then is the basis having gone ahead? The PIC’s answer is disquieting. Ms Paton reports that a key assumption was an expectation of leveraging “the government’s adspend to greater effect than other media houses, because it was black-owned”. There's a number of troubling issues here. Adverting spend is like any other government spend and not a form of largesse. Advertising should be placed where the intended target audience is to be found using techniques of media placement that are well understood. Departing from this principle is nothing other than misspending public money. Yet it is a PIC assumption that supports a billion-rand investment thesis. Adspend from the private sector has to remain the main source and a loss of credibility does nothing to keep this source of revenue going.

Even if one accepts the PIC assumption and that the New Age newspaper ceases to be the main beneficiary of government adspend for newspaper, the total amount of government adspend for newspaper, although useful, does not change things much. Television and radio (mostly SABC) takes the lion’s share.

But let us give the PIC all the benefit of any doubt and accept that Independent Media can become the next Naspers. From the way that their investment is structured, it is still a terrible investment for the GEPF. Most of the exposure is in senior debt with almost no upside and the loan to the Sekunjalo consortium so that it could buy its shares would not generate much better returns. In short, the GEPF takes almost all the risk but most of the upside, if it ever happens, belongs to Sekunjalo. Any private equity investor would see that immediately.

A billion-rand dud investment won’t make much of a dent on the GEPF’s portfolio. Inevitably, even when applying strict prudential criteria, some investments tank, but if failures from highly speculative investments grow (and there have been a few of those), we could be creating huge problems for the country. After all, as the late US senator Everett Dirksen once quipped, “A billion here, a billion there, and pretty soon you're talking about real money.” Moreover, as Mr Theobald observes, “(e)very taxpayer and fund beneficiary hoping for increases in benefits has a vested interest in ensuring the PIC does its job properly and does not become a political instrument. That would be very expensive for all of us.”

For now, a sizable proportion of GEPF beneficiaries are public servants employed by the state prior to 1994 falling in a constituency represented by Solidarity, but that is changing rapidly. Cosatu-led unions managed to force the postponement of well-considered amendments to the tax laws designed to discourage workers from cashing in their pension funds when they resign or retire. Cosatu’s unions in the public sector now represent the majority of its members – they should rather be keeping a careful watch on what is happening at the GEPF, for their members and for future taxpayers. DM

  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions (qedsolutions.co.za) out of Cape Town.

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