Why Naspers’ Multichoice’s unbundling doesn’t address the Tencent discount

Naspers' recent announcement of the decision to unbundle Multichoice and list it separately has raised questions within the market regarding the strategic implications and reasons behind this move. In a recent interview on CNBC Africa, Nesan Nair, Senior Portfolio Manager at Sasfin Securities, provided valuable insights into the factors driving this decision and its potential impact on the company's valuation and operations. The decision to unbundle Multichoice comes as no surprise to many market analysts, given the challenges faced by the business in recent years. Multichoice's valuation within Naspers' share price has been declining, making up around 300 grand or so. The company's subscription base is under pressure, facing fierce competition from video on demand services like Netflix and YouTube. This increased competition has made it difficult for Multichoice to raise subscriptions by the usual 10-15% annually, impacting its revenue stability. For a significant period, Multichoice served as the cash cow for Naspers, funding investments in internet companies such as Tencent, Mail.ru, and OLX. However, with the changing landscape and the headwinds faced by Multichoice, the need to unlock the Tencent discount became apparent. Naspers indicated a strategic review to address the discount to Tencent, signaling the decision to unbundle Multichoice as part of this process. The unbundling will result in a separately listed entity for Multichoice, raising questions about the potential interest from investors. With 20% owned by Petuma Nati, the remaining 80% will be up for grabs, subject to valuation and investor appetite. Nair highlighted the challenges that Multichoice will need to navigate in transforming its business model to stay relevant in a competitive market. The company's Showmax video on demand service, while a step in the right direction, will require further enhancements to compete effectively. Multichoice has hinted at plans to produce local content to attract a regional audience, similar to global giants like Netflix. However, producing quality content incurs significant costs, which may impact the cash flow yields that Multichoice has enjoyed over the past decade. The move towards local content production will require a strategic shift in the company's operations, impacting its financial performance in the short term. Nair emphasized the importance of this transformation for Multichoice to remain competitive and unlock new growth opportunities. The unbundling of Multichoice from Naspers marks a significant strategic shift for the company, reflecting the changing dynamics of the media and entertainment industry. As Naspers navigates this transition, the market will closely watch how Multichoice adapts its business model to thrive in an increasingly digital landscape.