China’s digital pay-television company StarTimes walked away the winner on Tuesday in the TopTV takeover saga, although at least one of the losing consortiums is considering challenging the legality of the deal. Government will be the biggest loser with losses over R1bn.

The meeting this week between creditors — including Disney, Fox and Warner International — and shareholders such as the Industrial Development Corp (IDC) and the National Empowerment Fund (NEF), involved a long and heated debate as well as a three-hour adjournment to allow international creditors to consult with their managements.

In the end, the rescue plan, which included StarTimes’s proposal, was passed overwhelmingly by the shareholders and creditors. However, one of the consortiums told the Mail & Guardian after the meeting: “This is far from over. They [StarTimes] have just won this round.”

In terms of the plan, the South African government agencies will see the biggest losses. The IDC, with its 30,9% stake, invested about R890m in TopTV’s owner, On Digital Media. It is likely to see little of its money, sharing what appears to be R9,3m with European satellite operator SES. The Development Bank of South Africa, which invested more than R200m, is expected to receive R30m and a 1,99% share in a new company, Newco, formed by StarTimes to oversee TopTV.

One of the main problems with the StarTimes deal, as outlined in the rescue plan, is that it’s very intricate and complicated and at first glance raises some concerns about a possible contravention of the Electronic Communications Act, which limits foreign ownership in broadcasters to 20%.

The StarTimes proposal is to take up 20% ownership in TopTV, which would be in line with the law. However, it also proposes setting up Newco, in which it has a 20% shareholding and gets 65% of the profits. It’s not a broadcast company.

In terms of the deal, On Digital Media is to sell Newco its electronic communications network services licence and the transmission fixed assets infrastructure. TopTV will also pay Newco management fees for signal transmission to subscribers and collection of subscription fees.

So extensive is the control by Newco that advocate Musa Sishange, who spoke on behalf of TopTV staff, asked what would be left for them to do. “If Newco will run the technology element of the broadcasting, customer service and subsequent acquisitions, what will TopTV’s role be? Put differently, does it not render most of the staff at TopTV redundant?” Sishange also asked what the black economic empowerment structure of Newco would be.

Business rescue practitioner Peter van den Steen, said the staff concerns would be dealt with in the agreement process. There are a number of agreements, including management and shareholder agreements, which still have to be concluded. Van den Steen said the StarTimes deal, as outlined in the rescue plan, provides only a rough outline. One competition consultant said the devil would be in the detail, which is still to be revealed.

Dynamic TV, a consortium comprising MSG Afrika and Falk Trading, one of two companies that submitted a late expression of interest, said it was “studying the process, outcomes and related implications of the decisions and will pronounce on the next steps in due course”.

TopTV, which began operating in May 2010, started with a bang and attracted almost 40 000 subscribers. But by October 2012 it had been placed under business rescue, with programming and transmission costs listed as two main problems.

According to Van den Steen, the rescue process was far from smooth. The major stakeholders had to buy into the process, which would inevitably leave them out of pocket. But he said liquidation would have benefited no one but the Development Bank of South Africa — the preferential shareholder — and payment would have been small.

The IDC and NEF were approached in September last year to assist with equity transfer payments of about R70m, with another R70m due by the end of the year. The IDC refused to hand over the final R14m payment due in December, despite threats of legal action by the business rescue team, and it was decided eventually to engage in negotiations rather than follow a costly legal route.

The development bank agreed to a payment holiday to allow a turnaround plan and to find a company willing to take over TopTV’s debt and ensure the company’s sustainability.

In December 2012, StarTimes was introduced to Van den Steen by content supplier Fox. StarTimes is a well-respected player in the pay-TV market, with operations in 16 countries in Africa and 7m subscribers in China.

On 26 March, it was given exclusive bidding rights and began its due diligence. StarTimes made an offer, which expired on 30 April. The deal appeared to be cut and dried until two rival bids (in the form of expressions of interest) were submitted around 24 April. Dynamic TV came in with a R500m soft and unconditional loan from MultiChoice, while a Kenya-based broadband and pay-TV operator, the Wananchi Group — backed by a US company — also put in a bid.

There was a lot of interest in the MultiChoice offer, which would have given creditors 20c in the rand, rather than StarTimes’s 10c in the rand. MultiChoice also had a good reputation among suppliers. In the end, creditors and stakeholders opted for an offer that was already on the table.

Media expert Abdul Davis, the head of research for Kagiso Asset Management, believes that TopTV is still a good buy, not just for the licences it holds in South Africa or the possibility of it being used by StarTimes to expand its Africa offering. The pay-TV market, which is not dependent on advertising, is a “good business model”, he said. The rescue plan puts the number of people with TVs at 11m — 4m of them pay-TV subscribers.

Davis said the introduction of digital terrestrial television would cut costs for TopTV as the public would need to buy their own set-top boxes, which TopTV had been subsidising.

Davis believes the MultiChoice loan offer probably had to do with the possible threat posed by the Chinese operator. A smaller operator, with interests largely in South Africa, would have suited MultiChoice better, he said. He said economies of scale brought down content costs substantially and this had been a weakness for TopTV. “The more subscribers one has the cheaper content gets,” he said.

StarTimes would be able to offer much lower subscriptions because programming costs could piggyback on existing deals. It’s not clear if StarTimes will go ahead with TopTV’s plans to launch three sex channels as a separate bouquet. — (c) 2013 Mail & Guardian