Johnnic`s convergence dream unravels
Three years ago, former Johnnic Holdings CEO Paul Edwards dazzled shareholders and analysts with a new strategy for his group that would unleash dormant synergies between its disparate properties and turn it into a new kind of high-yielding business sitting at the intersection of commerce, content and connectivity.Edwards in 1999 took up the reins of Johnnic Holdings, at that time an investment trust with interests in areas as diverse as breweries, media, property and pharmaceuticals. Almost immediately he set to work to reshape the conglomerate into a sexy entertainment, media and telecommunications play, underpinned by a strategy of “digital convergence”.He envisaged a world in which Johnnic`s corporate and consumer customers would be able to access services and content from the group`s sprawling media assets wherever they were with practically any device imaginable and at any time, using fixed-line, satellite or cellular connections supplied by the group`s telecom business MTN.Edwards reasoned that the connectivity the group`s star performer, MTN, sold was nothing more than a commodity or utility. The best hope to gain an advantage in the fiercely competitive cellular industry would be to wrap “sticky” content and services, supplied by other group companies, around the cellular group`s voice and data connections.At the same time, such a strategy would revitalise the struggling media and entertainment assets held in the Johncom subsidiary by extending their reach into new markets, creating cross-selling opportunities and building economies of scale through shared resources and infrastructure.Through a single interface hooked into an integrated back-end, a user would be able to book movie tickets for a show at Nu Metro, check share prices on I-Net Bridge, read the Sunday Times, the Financial Mail or Business Day, and buy a book online from Exclusive Books.The vision was breathtaking in scope and perhaps a little ahead of its time, especially in a country in such as South Africa with its low penetration of Internet users.But Edwards had the right answers to soothe any fears among Johnnic`s investors. He pointed out that Johnnic had independently developed a business model that was finding favour in Europe and the US, where Vivendi coughed up $34 billion for the Universal movie and music businesses, and where Time Warner had just sold itself to America Online (AOL) in a spectacular $81 billion deal.Edwards liked to brag that the biggest difference was that Johnnic had thought it of first. Heads rollJohnnic is less eager to compare itself with AOL Time Warner these days, and for reasons that are easy to understand. The convergence business model has turned out to be a damp squib everywhere it was tried.The heads of those who championed digital convergence at European and American groups such as Vivendi-Universal, Bertelsmann and AOL Time Warner have rolled after the media conglomerates saw their share prices tank and profitability fall through the floor. Edwards`s departure from Johnnic last year, however, is said to have little to do with his convergence strategy.Whereas AOL Time Warner once trumpeted the synergies between its old and new media businesses, the group has now started to emphasise the autonomy of its many business units.Time Warner shareholders have come to resent the negative attention that AOL attracts for government investigations into its accounting practices and dismal online advertising revenues, while earnings are still strong in the group`s film, publishing, and television interests.Speculation is rife that the conglomerate may turn to the ultimate irony, and look to spin off the troubled AOL Internet business – the senior partner in the boom-time merger – and renew its focus on print, film and broadcast media.As for Johnnic, its recently announced plans to unbundle its shareholding in MTN to shareholders and explore ways of unlocking value from Johncom are an admission that both the convergence strategy and its bid to enrich its black shareholders, many of whom used debt to buy into the group, have failed.Johnnic Holdings remains nothing more than an unwieldy value-trap, the unwanted by-product of the restructuring of South African industry after the end of apartheid. Its continued existence was mostly justified by the fact that it provided MTN with a substantial black empowerment shareholding.MTN management`s purchase of the 18.7 percent of the cellular company held by Dutch investment company Ice Finance means that there is now little reason not to unwind Johnnic Holdings.Disposing of its assets and distributing the proceeds seems to be the best way of putting some money back into the pockets of the National Empowerment Consortium [NEC]. NEC is an investment vehicle made up of black business and trade union-linked investment companies that bought into Johnnic when Anglo American unbundled its share in the group in 1996. High rollerJohnnic`s big bet on convergence has not been as expensive as Naspers`s M-Web, nor as disastrous as Primedia`s Metropolis. The Internet division is poised to reach Ebitda breakeven by the end of March, as Johnnic promised three years ago, and most of its 11 businesses are Ebitda positive. Nonetheless, it is probably fair comment that Johnnic`s Internet play hasn`t delivered on its initial promises.Like its international counterparts, Johnnic went on a spending spree as it sought to build up critical mass in the Internet world. It created the e-Ventures division [now called Johnnic Digital Media] to house its Internet interests and serve as the bridge between the telecom and content businesses.The group spent around R150 million to buy a range of business-to-business and business-to-consumer Internet ventures, of which R90 million was used to buy out Dimension Data`s 25 percent stake in I-Net Bridge, the online business news and financial information service.Since it started out with its convergence strategy, the group has disposed of businesses such as TicketWeb, Ananzi and Sportal that it once hailed as cornerstones of its consumer Internet and convergence strategies.To be fair, Johnnic only spent a small fraction of the money that rival Naspers has poured into M-Web to build and buy its B2C properties. It was also firm in its belief that it needed subscription revenues from its online ventures because it doubted from the outset that it was possible to be profitable on online advertising alone.“We [Johnnic Digital] made some imprudent investments, but they were of a relatively small size. We have now pulled out of the consumer market entirely,” says Johnnic Digital CEO Neil Jacobsohn.Today, Johnnic Digital focuses almost exclusively on the B2B and e-learning markets through ventures such as I-Net Bridge, TradeWorld, the Learning Channel and CareerJunction.Nonetheless, Jacobsohn insists that Johnnic is reaping some benefits from digital convergence, even if these do not take the forms that were envisioned four years ago.“The real money, power and potential of the Internet lies in taking old economy businesses and processes and making them more efficient. As a consumer, do I really want to watch a movie on the screen of my cellphone? I think a lot of those applications are nonsense. But if I`m a big company, do I want to give my salespeople access to stock information while they`re on the road? Yes, of course,” says Jacobsohn.As Jacobsohn hints, the slow rollout and disappointing uptake of mobile commerce in the consumer market is one reason the convergence vision failed to become a reality. MTN`s decision not to pitch for the major shareholding in South Africa`s second network operator (SNO) drove the final, ahem, nail into the coffin of Johnnic`s convergence plan.Had Johnnic managed to get a fixed-line telecom licence under its belt and started to roll out broadband connectivity to consumers and corporate customers, it would have had a platform for delivering high-value, multimedia content to a captive audience. Cherry pickingMany industry observers suspect that Johnnic would have disposed of Johncom several months ago if it had found a buyer willing to pay the right price for the business. The major obstacle that Johnnic faces is that there are few takers for Johncom`s loss-making Internet and low-margin entertainment businesses and no visible buyers who are willing to absorb Johncom in its entirety.The only party that has so far publicly expressed its interest in Johncom is black empowerment group New Africa Investments Limited (Nail), which has aspirations of becoming one of the largest media companies in the country.Nail CEO Saki Macozoma doesn`t talk about convergence or the Internet, but rather speaks about the consolidation and vertical integration of the relatively fragmented media industry in South Africa. He has long argued that the country has space for three or four mainstream media groups at the most, and he is determined that Nail will rank alongside Naspers, Primedia and Independent as one of them.If Nail pulls off its bid, it will catapult the black economic empowerment group into the very top ranks of South Africa`s print media industry – the one area where it sees strong growth after the regulator, Icasa, blocked its bid to expand its broadcasting interests by acquiring Kagiso Media.“Publications such as Sunday Times, Business Day and Financial Mail would sit well in anyone`s portfolio. By combining these businesses with our existing print assets, we could achieve significant economies of scale and transform Nail into one of the most meaningful print media companies in South Africa,” says Macozoma.Johncom is valued at somewhere between R1.5 billion and R2 billion. Macozoma won`t be drawn on how much Nail is willing to pay for the media business, which contributed around a third of Johncom`s turnover and fourth fifths of its Ebitda in the six months ended September 2002.He confirms, however, that Nail has had exploratory talks with Johnnic Holdings about buying certain Johncom assets, and says his group is preparing a formal proposal to present to Johnnic`s board. It seems likely Nail`s bid will be an attempt to cherry-pick Johncom`s most attractive print media assets rather than to buy the whole operation.Nail briefly considered buying Johncom in its entirety and then selling off the businesses it doesn`t want, but has since rejected this option, says Macozoma. “It simply makes more economic sense to buy what we are interested in,” he adds. A clean breakThis stand could prove to be a deal-breaker. Johncom`s directors are equally adamant that Johncom will not and should not be broken up to accommodate any potential new owners.“[Johnnic] Holdings has no plans to break up Johncom. Our vision is that it must remain an integrated media and entertainment business, and we will continue to make a case for that vision,” says Jacobsohn possessively, speaking as an executive director on Johncom`s board.Johnnic`s official line has remained unchanged for several months. The holding company says it is exploring a number of options for unlocking shareholder value from Johncom and has yet to take a firm decision. However, the board seems eager to structure a transaction that will allow it to jettison Johncom cleanly while extracting the maximum value out of the transaction.Nail isn`t the only likely bidder for the media and entertainment group, although it is certainly the most vocal. Others who may be interested in buying part or all of Johncom include Naspers [which is eager to strengthen its business publishing arm], Caxton [an associate company in which Johncom owns a 35 percent stake], and foreign media groups with aspirations to become major players in South Africa [such as Nigeria`s ThisDay].Speculation also puts management at Johncom, backed by venture capital firm Ethos Private Equity, near the front of the bidding queue.Even among these prospects, Johnnic will struggle to find one party that has both the money and inclination to buy Johncom outright. If one factors in the imperative to find a buyer that has the right empowerment credentials, it looks like Johnnic may be asking for the impossible. Stepping offWhatever form Johncom takes in the future, it`s certain not to form part of some new high-tech convergence plan. South African media groups such as Primedia and Naspers have already burnt their fingers with their own high-tech ventures, and media groups around the world are scrabbling back from Internet over-commitment.To date, convergence hasn`t delivered any particularly exciting returns for shareholders or consumers. Most media groups can point to some benefits from convergence, but nothing that justifies the time and money they spent architecting businesses that straddle the worlds of connectivity, new media and old media.AOL Time Warner cited gaining 100 000 subscriptions to Time magazine from the AOL subscriber base as one of the first wins of its convergence model. Meanwhile, the best example Vivendi Universal has yet been able to offer of convergence in action is giving its cellular subscribers the ability to download tunes from artists in its music stable to use as their ring tones. In both of these examples, better results could probably have been achieved through business partnerships rather than through risky and expensive mergers.Likewise, most of the promised synergies between Johnnic`s content and delivery businesses never really materialised. Part of the problem was that infighting between various Johnnic divisions made cooperating difficult. But more importantly, shareholders and analysts didn`t share Edwards`s belief that selling cellular starter packs bundled with a Lord of the Rings SMS game was evidence of a groundbreaking new business model for the telecom and media industries.Many media and technology leaders remain convinced that the proliferation of cheap broadband connectivity and cable television in the US will ensure convergence becomes a reality.But South Africa, hamstrung by Telkom`s protracted monopoly, will probably have to wait several years before broadband becomes widespread enough to justify another big convergence play by local media groups.AOL Time Warner, for its part, may decide to ride out the storm of criticism rather than trying to pry apart the new and old media businesses they spent two years integrating. Some of the international new and old media hybrids may be broken into pieces to appease angry shareholders, though this will mostly benefit the investment bankers that helped to put them together in the first place.“[AOL Time Warner] is the victim of hype and an unforgiving American market. I still believe, however, that we`ll eventually move into an environment where you can access any information or application with whatever device is at hand,” says Jacobsohn.No one is sure, however, whether it will take two years or two decades for these high-tech dreams to become a reality and they`re not willing to bet on it happening sooner rather than later.
05 March 2003
Three years ago, former Johnnic Holdings CEO Paul Edwards dazzled shareholders and analysts with a new strategy for his group that would unleash dormant synergies between its disparate properties and turn it into a new kind of high-yielding business sitting at the intersection of commerce, content and connectivity.
He envisaged a world in which Johnnic`s corporate and consumer customers would be able to access services and content from the group`s sprawling media assets wherever they were with practically any device imaginable and at any time, using fixed-line, satellite or cellular connections supplied by the group`s telecom business MTN.
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