Unbundling of MultiChoice weakens Naspers business diversity - Moody's

The decision by Naspers to unbundle its video entertainment (VE) operation is credit negative for lenders, ratings agency Moody's said in a research note on Wednesday.

In Moody's view, this is because the spin-off reduces Naspers' business diversity and removes a business that had been generating a meaningful recurring dividend income available to service debt obligations.

S&P Global Ratings, meanwhile, announced on Wednesday in an analysis report that its rating and outlook of Naspers (BBB-/Stable/A-3) remains unchanged following the company's announcement, saying the transaction's rationale appears sound. 

On Monday Naspers - rated as Baa3 stable by Moody's - announced its intention to spin off its VE operation and to list it on the JSE, with Naspers' investors remaining shareholders in the newly listed entity.

As a result, Naspers will not receive any cash proceeds as part of the spin off and its capital structure will remain unchanged with Naspers retaining the group's existing debt of $3.2bn.

Moody's added, however, that Naspers’ credit profile remains supported by its increasing profitability and cash generation from e-commerce as well as its strong liquidity position given its sizable cash balances and investments in entities such as Tencent Holdings (A1 stable), whose material value and dividend income stream "has been a key source of cash flow and liquidity for Naspers in the past".

The VE business is one of Naspers’ most mature investments and has historically been a stable cash flow contributor, representing around 50% of dividends to the holding level, commented Moody's.

"As such, the loss of dividends from the VE segment weakens the diversity of Naspers’ cash flow available to service interest payments from dividend inflows, though the aggregate cash resources for debt servicing remain strong," states the research note.

"We calculated that the holding company's cash interest coverage ratio for 31 March 2018, as measured by dividends received less head-office cost/interest expense, was around 3.4x, and on a pro forma basis (excluding VE dividends) would fall to around 1.5x and increase to around 2.5x for fiscal 2019, which ends 31 March 2019."

Moody's regards the interest cover ratio as manageable and expects it to trend back toward 3.0x owing to growth in Tencent dividends and growing dividend contributions from Naspers’ profitable classified business.

However, Moody's considers the dividend mix to be more susceptible to volatility and uncertainty given that Naspers does not have full control of dividend distributions from Tencent, and its profitable classifieds operations has a limited track record over dividend distributions.

"We nevertheless recognise that there has been a consistent track record of growing dividend contributions from Tencent, with Naspers receiving $247m during the 2018 financial year, up from $191m in the prior year," states the research note.

Despite the weakened business profile, Naspers’ credit profile benefits from its high cash balances of around $10.5bn and its material equity stake in Tencent, which was valued at $122bn as of 17 September, in Moody's view.

Combined with Naspers’ other listed investments - Mail.ru Group, Delivery Hero SE and MakeMyTrip - the listed portfolio value covers the outstanding debt - including founder put options - by 22x, providing an additional source of funds, the ratings agency pointed out.

"Our rating reflects our expectation that Naspers will maintain a prudent financial policy against a growth strategy that requires a high initial capital investment to broaden its reach and entrench its market-leading positions in its core e-commerce businesses, including classifieds, food delivery and financial technology," said Moody's.

"Looking forward, our credit analysis will continue to focus on the evolution of profitability, free cash flow and delivery of dividend growth from ecommerce investments whilst maintaining a strong liquidity profile to mitigate any potential cash flow shortages."

Spinning off the VE business is subject to the approval of the requisite regulatory authorities and will likely be concluded during the first half of 2019.

For the year that ended 31 March 2018, the VE business that is being spun off generated revenue of $3.6bn, equivalent to 18% of Naspers' revenue on an economic basis (equity-accounted investments are proportionately consolidated) and a trading profit of $478m, or 14% of the groups trading profit.

The new company will be named MultiChoice Group. It will include MultiChoice South Africa Holdings and its subsidiaries, associates and/or affiliates, MultiChoice Africa Holdings and its subsidiaries, associates and/or affiliates), MultiChoice Botswana, MultiChoice Namibia, NMS Insurance Services SA, the African division of Showmax and its subsidiaries, associates and/or affiliates, Irdeto Holdings and its subsidiaries, associates and/or affiliates) and Irdeto South Africa.

Naspers said in a SENS statement that this marks a significant step for the group as it continues what it calls its "evolution into a global consumer internet company".

It expects that listing MultiChoice Group via an unbundling will unlock value for Naspers shareholders and at the same time create "an empowered, top-40 JSE-listed African entertainment company".

S&P weighs in

S&P Global Ratings announced on Wednesday in an analysis report that its rating and outlook of Naspers (BBB-/Stable/A-3) remains unchanged following the company's announcement that it intends to separately list and simultaneously unbundle its VE assets.

In the view of S&P, the transaction's rationale appears sound, and creates a separately listed African VE business with solid empowerment credentials, while tilting Naspers' investment portfolio more toward e-commerce (focused on classifieds, food delivery, and fintech investments), in line with company strategy.

S&P said that, although the VE asset unbundling could reduce Naspers' investment and revenue diversification, it also further demonstrates the company's willingness to actively manage its portfolio and use disposals as a tool to realise and create value.

"We think the proposed transaction will have a limited immediate impact on Naspers' leverage, loan-to-value (LTV) ratio, cash flow adequacy, and business profile, given our assessment of Naspers as an investment holding company," said S&P.

"Our current rating thresholds are a LTV ratio of 15% and cash flow coverage of at least 2x, which we expect the company will meet in spite of the proposed transaction."

In S&P's view, higher dividend streams received from the classifieds business and the sale of a 2.1% stake in Tencent will compensate for the loss of the dividends received from the VE business.

It expects the proposed MultiChoice Group entity to have little or no leverage, and will be unbundled along with any net cash held within the relevant corporate entities at the time of the unbundling. Consequently, S&P does not expect a material change in Naspers' leverage metrics or trajectory.

It points out that the VE assets to be unbundled only represent about 4% to 5% of Naspers' net asset value (NAV), and as such, the ratings agency expects the unbundling will also have a limited impact on its LTV metrics, under which there is significant rating headroom.

"It is also notable that, post the sale of the stake in Tencent and the closing of the Flipkart sale in August 2018, Naspers has on-balance-sheet cash resources of about $10.5bn, signalling significant financial flexibility vis-a-vis its total debt of $3.2bn (fiscal year ending March 31, 2018) at holding company level," said S&P.

* This article was updated with S&P's comments on Thursday at 16:00.

* Fin24 is part of Media24, which is part of Naspers.

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