On Monday, 21 August, we spoke to Bruce Whitfield on The Money Show on Radio 702 and Cape Talk of that day’s R450 million sale of the Gupta media assets, ANN7 and The New Age, to Mzwanele “Jimmy” Manyi’s consortium, Lodidox.
The feature focused on the business valuation of media assets and made business owners aware of the importance of a correct business valuation in assessing their enterprise as an Asset of Value when they put it on sale.
The feature also highlighted the methods of business valuation, the risks involved for the buyer and why they should be aware of these factors.
So how was the valuation of R450 million arrived at and what methodology was used to reach that figure?
We start with the historic performance of the business and take it from there. The way to value a business asset is the discounted free cash flow method, which has three levers to it.
The 3 levers
The first lever is how far into the future can this business operate? Will it last? Will it perform in the future the way it has performed before? Does it have good growth prospects for the future? The longer you can see into the future, the higher the valuation.
The second lever is the seam of free cash flow. How much money will the business make each month? How thick is this seam of free cash flow? The thicker the seam, the higher the value of the business.
The third lever is the risk of sustainability. When you look at these three levers and make an assessment of each, you can put together a model for valuation.
Evaluating the risks
What sort of profits are the two media companies making to justify the R450 million price tag?
There are areas of risk to consider here:
Risk of supply – ANN7 is linked to DStv. What is that relationship like? Is it stable? If DStv switches off ANN7, there is no TV station. On The New Age front, what is the relationship with the printers because printing and distribution are primary costs? One needs to have a better understanding of these aspects. Does the newspaper have a digital strategy? The business model of media is being disrupted by digital for example, the biggest beneficiaries of the advertising industry in South Africa is Facebook, which is robbing the media industry of revenue.
Risk of delivery – What sort of staff do they have? Is this stable? What is the distribution like? Also, the most worrying part in any valuation is annuity revenues. Do you wake up every day having to sell or do you have long-term contracts with your advertisers? If you do, are there advertisers that make up more than 10% of your revenue? If you have a big advertiser that makes up most of your revenue, you are under tremendous risk. All these elements scale back dramatically from the valuation of the business.
Risk of demand – Is the business made up by customers who consume the product and who advertises it? Are there customers who make up more than 20% of revenue and will they stay? What is competition like for these customers and what value can your competitors add over and above what you have to offer. Holding onto customers in a ‘buyer’s market’ holds many challenges to sustainable revenues!
Contextual risk – This may take the form of changing consumption habits, technology and new competitors entering the market. Evaluate the risk and start mitigating it with a real plan. How do you ensure your supply and distribution and how do you sustain the demand or plan for the contextual risk of falling demand?
Team Risk – Who is buying and who is selling? Does the buyer have the technical, strategic and operational skills to run the business? Also, this business is made up of people – they are walking assets. Will they stay or go and have the key people been locked into the deal?
If you look at the R450 million price tag, a thumb-suck method to see what kind of profit you should make out of the business to earn that price tag is to apply the PE, a future earnings ratio.
What sort of P:E ratios are coming out of the media sector? They are dismal. It’s very hard to find a pure play, in other words, a pure media business that has newspaper and TV that you can get good comparisons from. Looking at the P:E ratio of similar companies allows you the ability to evaluate if your P:E ratio is in line with industry levels.
Several elements may affect your free cash flow or P:E ratio, which is dramatically reduced if your business is unlisted. If you are a pure-play business and have not diversified your offering, this may reduce your value. A business with a pure-play offering may not recover if its product offering becomes less attractive. The environment of the sector or industry will also impact on your value. This is evident in the media industry at the moment and makes the ANN7 and The New Age sale an interesting example. Finally, your barriers to entry or licences to trade in a certain industry will also have an effect.
For this price tag, this business should be generating a minimum of R95 million per annum. Is it? We don’t know. If it’s not, the buyer will burn!
The valuation of a business is a complex process and you need to weigh up several issues to achieve an accurate appraisal.
Aurik Business Accelerator works with entrepreneurs to build their businesses into an Asset of Value and, if the entrepreneur chooses, it can be sold for a premium price.