HiTV failed. TStv is struggling. DStv is winning territories. If you look at these companies, you will notice a clear catalytic difference: funding mechanisms. DStv was built by the largest purse in Africa, the unlimited Naspers of South Africa, which has so much money that it could buy all the publicly traded stocks in Nigeria with just 30% of the Group’s market cap. This is a company that battles Facebook and comes out as a winner. MultiChoice, though separated and traded differently now, connects to that heritage of wealth. At any point, Naspers has more cash on its balance sheet than …. (let me not make people feel bad).
This is my point: MultiChoice was not built with debt. But HiTv and TStv went through life via debts. In the media business, in Nigeria, that is very risky. It is nearly impossible to grow faster than your bank interest rate. Yes, if the interest is 25%, it technically means that to have the capacity to pay that loan, you need to be hitting excess of 40%, on value creation. That is nearly impossible in a media business where leverageables are linear, not exponential.
Read this piece by Toyin Subair, the former CEO of bankrupt HiTv. He summarized the HiTv paralysis elegantly: “As I said earlier, we were impeded from doing this at the right time. At 25-27% interest on debt, most businesses cannot survive and you will be a slave to the banks for life. That is why they take collateral from you. They lend against your collateral not your business case.” Then, he dropped more lines on why HiTv failed.
We paid 40 million dollars for the first year of the second term of the EPL from mostly equity. But still had to come up with a guarantee of about 70 million dollars for the latter 2 years and in Nigeria, guarantee requires cash in bank. The alternative bank we were forced to use despite all their assurances and being offered half of the amount by another Bank failed to issue same on that fateful Tuesday and only offered it to us on Thursday. Meanwhile the EPL sold it to our competition on Wednesday morning.
What laws do you need, or what interpretations of the laws do you require, go and get it passed or adjudicated. Don’t assume its there and don’t be afraid of offending anyone. A few weeks before we lost the EPL rights we were approached by the competition to share it with them, in writing. We agreed and were completing the approvals on both sides when we lost the rights. Since they bought it, we asked them for it on the same terms as we had agreed to give it to them just 2 weeks prior, they refused. We ran to government to enforce the fairness clauses of the NBC Act but it fell on deaf ears.
There is one conclusion here: if you take debts, running at 25% per year in a total addressable market of about 30 million people, with only possibly 20% interested (i.e. 6 million customers), you need to do magic to survive your 5th birthday on this business. (MultiChoice has about 5.2 million customers). Largely, the size of the effective market is too small to fund that level of debt in Nigeria. Based on that, there is no way anyone can build DStv challenger on debt. The best path remains equity where the cost of capital is not high, directly at most, on the business balance sheet.
One can build on debts on some sectors. So, it is not a blanket statement. The point is that the business most grow faster than the rate of debt-growth for that debt to be leverageable. But you cannot be growing 10% when you debt is at 27%! I have a small equation for the inflection point – when to go debt or equity across sectors. But note that dollar denominated debts when you are collecting revenue in Nigerian naira will largely fail.