Multichoice

Background information

MultiChoice Group Limited (formerly MultiChoice Group Proprietary Limited and K2018473845 (South Africa) Proprietary Limited) was incorporated on 4 September 2018, as a wholly owned subsidiary of the Naspers Limited Group (Naspers).

On 28 September 2018, MultiChoice Group Limited (the company) received a parent company contribution from Naspers of MultiChoice South Africa Holdings (Pty) Ltd group, MultiChoice Africa Holdings B.V. group, Irdeto Holdings B.V. group and the Showmax B.V. group. This resulted in the formation of the MultiChoice Group (MCG or the group).

On 27 February 2019 the group was listed on the Johannesburg Stock Exchange (JSE) and on 4 March 2019 was unbundled from Naspers to its shareholders as a dividend in specie. Up until this date the results of the group were consolidated within Naspers as part of the video-entertainment segment.

The year ended 31 March 2019 is the first financial year the group will present summarised consolidated financial results.

Presentation of summarised consolidated financial results

Although there was a change in the legal ownership of the underlying subsidiaries, the previous shareholder, Naspers, retained control of the company and its newly contributed subsidiaries both before and after the time of the creation of the new group (the Restructuring). The Restructuring is a business combination under common control as defined by IFRS 3 Business Combinations. Although IFRS 3 defines a business combination under common control, IFRS 3 does not provide any guidance on accounting for these types of business combinations. Therefore management has developed an accounting policy to present the results and financial position of the group, including the comparatives, at 31 March 2019 as follows:

• The summarised consolidated financial results have been prepared on the basis that the entities have always been consolidated and therefore the comparative information incorporates the results, assets, liabilities and disclosures of all entities that form part of the group.
• The summarised consolidated financial results was prepared as a combination of the historic financial information recognised in the Naspers consolidated financial statements related to the group; no new goodwill was recognised (predecessor accounting).
• Contribution from parent – As a result of applying predecessor accounting, the contribution from Naspers was recognised at the carrying value of the net assets contributed to the company at the earliest comparative period presented in the summarised consolidated financial results. On unbundling from Naspers this has subsequently been converted to the retained earnings of the group and has been renamed as such for all periods presented.
• Intercompany – Transactions and balances with Naspers Limited and Naspers group companies have been disclosed as related party transactions and balances up until the date of unbundling. Thereafter these have been reflected as third-party transactions and balances.

The measurement and recognition policies applied in the preparation of the summarised consolidated financial results are consistent with those applied in the combined historical financial information that was included in the pre-listing statement published on 21 January 2019.

The summarised consolidated financial results for the year ended 31 March 2019 are prepared in accordance with the JSE Limited (JSE) Listings Requirements (the JSE Listings Requirements) relevant to summarised financial statements and the provisions of the Companies Act No 71 of 2008. The JSE Listings Requirements require provisional reports to be prepared in accordance with the framework concepts, the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council, and to also, as a minimum, contain the information required by IAS 34 Interim Financial Reporting. The summarised consolidated financial results do not include all the disclosures required for complete consolidated annual financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB). The accounting policies applied in the preparation of the consolidated annual financial statements from which the summarised consolidated financial results were derived, are consistent with those applied in previous financial years, except as set out below.

The group has adopted all new and amended accounting pronouncements issued by the IASB that are effective for financial years commencing 1 April 2018. None of the new or amended accounting pronouncements that are effective for the financial year commencing 1 April 2018 had a material impact on the group.

The group’s reportable segments reflect the components of the group that are regularly reviewed by the chief executive officer and other senior executives who make strategic decisions.

Trading profit excludes the amortisation of intangible assets (other than software), but includes the finance cost on transponder leases, while trading profit and EBITDA (earnings before interest, taxation, depreciation and amortisation) exclude impairment of assets, equity-settled share-based payment expenses and other gains/losses.

The group adopted the following new accounting pronouncements, set out below, during the current period.

Pronouncements adopted with adjustments to the opening balance of retained earnings

Adjustments to the opening balances of the statement of financial position (extract)

Management expects that 35% of the transaction price allocated to the unsatisfied contracts as of 31 March 2019 will be recognised as revenue during the next reporting period (R123m) and 31% (R109m) will be recognised as revenue in the FY2021 reporting period. The remaining 34% (R118m) will be recognised as revenue in FY2022 and thereafter. The amount disclosed above does not include variable consideration which is constrained.

All other technology contracts are for periods of one year or less or are billed based on time incurred.

On 4 March 2019, the date of the group unbundling from Naspers Limited, the group allocated, for no consideration, an additional 5% stake in MultiChoice South Africa Holdings Proprietary Limited (MCSA) to Phuthuma Nathi Investments (RF) Limited and Phuthuma Nathi Investments 2 (RF) Limited (collectively Phuthuma Nathi). In terms of IFRS 2 Share-based payments, this transaction is treated as an equity-settled share-based payment. The value of the 5% allocated to Phuthuma Nathi shareholders has been calculated at R2.6bn which has been included in the summarised consolidated income statement and in retained earnings in the summarised consolidated statement of changes in equity.

After the allocation to the non-controlling interest, the transaction had an adverse impact on earnings and headline earnings of R1.9bn or 438 SA cents per share.

The transaction also caused the group’s effective tax rate to increase by 76%. Overall, the group’s effective tax rate increased from 59% in FY2018 to 151% in FY2019.

Commitments relate to amounts for which the group has contracted, but that have not yet been recognised as obligations in the summarised consolidated statement of financial position.

The group operates a number of businesses in jurisdictions where taxes may be payable on certain transactions or payments. The group continues to seek relevant advice and works with its advisers to identify and quantify such tax exposures. Our current assessment of possible withholding and other tax exposures, including interest and potential penalties, amounts to approximately R1.8bn (2018: R1.7bn). No provision has been made as at 31 March 2019 and 2018 for these possible exposures.

The group’s activities expose it to a variety of financial risks such as market risk (including currency risk, fair-value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The summarised consolidated financial results do not include all financial risk management information and disclosures required in the consolidated annual financial statements and should be read in conjunction with the consolidated annual financial statements for the year ended 31 March 2019.

The fair values of the group’s financial instruments that are measured at fair value are categorised as follows:

Currency depreciation features relate to clauses in content acquisition agreements that provide the group with protection in the event of significant depreciations of the purchasing entity’s functional currency relative to the currency of the content acquisition agreement. The fair value of currency depreciation features is measured through the use of discounted cash flow techniques. Key inputs used in measuring fair value include the terms and benchmark rates contained in content acquisition agreements and spot exchange rates prevailing at the relevant measurement dates.

The group discloses the fair values of the following financial instruments as their carrying values differ from their fair values:

Level 3 – the fair values of all level 3 disclosures have been determined through the use of discounted cash flow analyses. Key inputs include current market interest rates as well as contractual cash flows.

The group entered into various related party transactions in the ordinary course of business. In total the contribution from Naspers Limited through the contribution of businesses (R3bn) and the capitalisation of loans (R23bn) as part of the unbundling amounted to R26bn.

Apart from the above there have been no significant changes in related party transactions and balances in the current financial year.

There have been no events noted, that occurred after the reporting date, that could have a material impact on the summarised consolidated financial results.

Independent auditor’s report on the summarised consolidated financial statements

To the shareholders of MultiChoice Group Limited

Opinion

The summarised consolidated financial statements of MultiChoice Group Limited, contained in the accompanying provisional report, which comprise the summarised consolidated statement of financial position as at 31 March 2019, the summarised consolidated income statement, summarised consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and related notes, are derived from the audited consolidated financial statements of MultiChoice Group Limited for the year ended 31 March 2019.

In our opinion, the accompanying summarised consolidated financial statements are consistent, in all material respects, with the audited consolidated financial statements, in accordance with the requirements of the JSE Limited Listings Requirements for provisional reports, as set out in note 1 to the summarised consolidated financial statements, and the requirements of the Companies Act of South Africa as applicable to summary financial statements.

Summarised consolidated financial statements

The summarised consolidated financial statements do not contain all the disclosures required by International Financial Reporting Standards and the requirements of the Companies Act of South Africa as applicable to annual financial statements. Reading the summarised consolidated financial statements and the auditor’s report thereon, therefore, is not a substitute for reading the audited consolidated financial statements and the auditor’s report thereon.

The audited consolidated financial statements and our report thereon

We expressed an unmodified audit opinion on the audited consolidated financial statements in our report dated 14 June 2019. That report also includes communication of key audit matters. Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period.

Directors’ responsibility for the summarised consolidated financial statements

The directors are responsible for the preparation of the summarised consolidated financial statements in accordance with the requirements of the JSE Limited Listings Requirements for provisional reports, set out in note 1 to the summarised consolidated financial statements, and the requirements of the Companies Act of South Africa as applicable to summarised financial statements.

Auditor’s responsibility

Our responsibility is to express an opinion on whether the summarised consolidated financial statements are consistent, in all material respects, with the audited consolidated financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (ISA) 810 (Revised), Engagements to Report on Summary Financial Statements.

PricewaterhouseCoopers Inc.
Director: B S Humphreys
Registered auditor

Johannesburg
14 June 2019

The group has presented certain revenue, cost and trading profit metrics in constant currency, excluding the effects of changes in the composition of the group (non-IFRS performance measures) in the following tables. The non-IFRS performance measures are the responsibility of the board of directors and is presented for illustrative purposes. Information presented on a non-IFRS basis has been extracted from the group’s management accounts, the quality of which the board is satisfied with.

Shareholders are advised that, due to the nature of the non-IFRS performance measures and the fact that it has been extracted from the group’s management accounts, it may not fairly present the group’s financial position, changes in equity, results of operations or cash flows.

The non-IFRS performance measures have been prepared to illustrate the impact of changes in foreign exchange rates and changes in the composition of the group on its results for the period ended 31 March 2019. The following methodology was applied in calculating the non-IFRS performance measures:

1. Foreign exchange/constant currency adjustments have been calculated by adjusting the current period’s results to the prior period’s average foreign exchange rates, determined as the average of the monthly exchange rates for that period. The constant currency results, arrived at using the methodology outlined above are compared to the prior period’s actual IFRS results. The relevant average exchange rates (relative to the South African rand) used for the group’s most significant functional currencies, were US dollar (2019: 13.82; 2018: 12.91); Nigerian naira (2019: 26.28; 2018: 27.87); Angolan kwanza (2019: 20.54; 2018: 13.86); Kenyan shilling (2019: 7.33; 2018: 7.99) and Zambian kwacha (2019: 0.81; 2018: 0.74).
2. Adjustments made for changes in the composition of the group (or M&A) relate to acquisitions and disposals of subsidiaries. For mergers, the group composition adjustments include a portion of the prior year results of the entity with which the merger took place. The following significant changes in the composition of the group during the respective reporting periods have been adjusted for in arriving at the non-IFRS performance measures:

The net adjustment made for all acquisitions and disposals that took place during the year ended 31 March 2019 amounted to a negative adjustment of R117m on revenue and a positive adjustment of R11m on trading profit.

An assurance report issued in respect of the non-IFRS performance measures, by the group’s external auditor, is available at the registered office of the company.

The adjustments to the amounts, reported in terms of IFRS that have been made in arriving at the non-IFRS performance measures are presented in the tables below:

11.1 Key performance indicators

11.2 Group financials including segmental analysis

11.2.1 Segmental results

11.2.2 Revenue and costs by nature

11.3 Reconciliation of headline earnings to core headline earnings

Core headline earnings excludes non-recurring and non-operating items – we believe this is a useful measure of the group’s sustainable operating performance. However, core headline earnings is not a defined term under IFRS and may not be comparable with similarly titled measures reported by other companies.

11.4 Reconciliation of cash generated from operating activities to free cash flow