Sagarmatha or virtual colonisation: It is time to set the record straight
Opinion / 23 October 2018, 06:00am / Dr Iqbal Survé
CAPE TOWN – In the week that President Ramaphosa is to host the SA Investment Conference, there are typically a number of media releases about investments in the manufacturing and mining sectors.
What South Africa needs right now is investment into the technology and services sectors. With its vast pool of unemployed young people, South Africa cannot afford to miss investing in these sectors.
This is our opportunity to skill up young people to participate in the technology revolution otherwise called the Fourth Industrial Revolution (4IR).
A few months ago, Sagarmatha Technologies was approved for listing on the JSE as the first African unicorn multi-sided platform (MSP) company.
Approval occurred after a rigorous eight-month process of engagement with the JSE. Sagarmatha was planning to raise R7.5 billion and was successful in commitments of R4bn from local and international investors.
The JSE had increased their normal minimum listing requirement from R500 million to R3bn for this listing and Sagarmatha had exceeded this by a billion rand.
The R4bn raised excluded the Public Investment Corporation (PIC).
We were disappointed that the PIC, which was overweight in Naspers as the only other technology platform company in the country, did not participate in the capital raise.
Nonetheless, we were confident that additional capital would be raised on a secondary listing in New York and Hong Kong.
Our investment teams had visited both the New York and Hong Kong exchanges in 2017, where they were enthusiastically received for a secondary listing.
Due to exchange control regulations, South African companies in most cases have to have primary listings in South Africa and secondary listings offshore.
Our objective was therefore less so about capital raising but more to enable us to have a secondary listing abroad.
We were aware that the South African capital markets were not familiar with technology companies in spite of the success of Naspers, whose investment in Tencent is responsible for its high market capitalisation.
We believed, however, that a listing on a South African exchange would provide South African asset managers and investors a second opportunity to participate in the platform economy.
MSPs are very different to non-technology platform companies. MSPs run at huge losses, but have an inverse relationship to value, especially in their first few years. The greater the loss, the higher the value. For example, Amazon which became the world’s second trillion dollar company after Apple, increased its losses for more than 15 years and is only recently profitable and trades at a stupendous multiple of earnings.
Similarly, Uber, another well-known MSP company with losses to date of $11bn ($404m last quarter), is now valued at $120bn; PDD, (an e-commerce company) which listed on the Nasdaq about three months ago, raised $1.6bn in the US capital markets and has a loss to date of almost $2bn but with a market capitalisation of more than $23bn.
Similarly, Bytedance, a news aggregator using artificial intelligence (AI) with a loss of almost $1bn, has a market valuation of $75bn. Netflix, which is very popular in South Africa, has incurred losses to date of $2bn, but has a market capitalisation of $160bn.
The above examples demonstrate that MSP companies have higher values with increased losses. This model, however, is not commonly understood by investors in South Africa.
Early this year, Harvard Business Review published an article by several professors explaining why current accounting valuation methodologies are no longer applicable to MSP companies and ignored by the capital markets.
Prominent professors Damodaram, Galloway and Teixeira from different Ivy League universities, confirm that the valuation modelling for MSPs is very different to non-technology companies.
They explain that this is the reason why the US is miles ahead of other countries since they have worked out this modelling and there is a huge investor community that understands it.
Sagarmatha is an MSP with 14 business sectors including e-commerce, digital media applications, online classifieds, social media and syndicated content.
To date these companies have received hundreds of millions of rand of investments from the Sekunjalo Group in order to keep abreast of technology, develop skills and increase market presence.
The listing of Sagarmatha was an opportunity to raise more capital in order to scale the business for the African continent and to skill up 5 000 young Africans in three African regional centres so that Africans can take ownership of the technology economy.
MSP companies are valued highly so that they have a low cost of capital which allows them to grow fast and win market share with more customers (consumers and businesses) on their platforms.
The low cost of capital is what allows Amazon, Alibaba, Tencent, PDD, Netflix and Uber to grow and dominate their platforms.
In South Africa, the legacy sectors such as mining, retail and property are what investors are used to, with the exception of Naspers.
In truth, Naspers is an arbitrage investment opportunity based on the value of Tencent.
Until South African investors embrace loss making technology companies, MSP platforms used by our consumers and businesses, will be owned by American companies.
This is virtual colonisation which is ironic considering Africa’s fight against colonisation in the past.
Sagarmatha is a wonderful opportunity for the country to benefit from inward investment, for asset managers to participate in a technology platform company and for us to skill our young people in the areas of artificial intelligence, data science and robotics so that they play a meaningful role in the economy of the future (some would argue the economy of the present).
When we approached the JSE, we realised that they had never before listed a “unicorn” or MSP.
We spent many hours with our advisers, explaining the MSP concept to the JSE.
In spite of the JSEs support, we soon discovered that the question of valuation became important, since there was no precedent for an MSP listing.
There was agreement that there was no expertise to value MSPs in South Africa and that we would use global expertise or companies that had valued hundreds of technology companies (such as WhatsApp, Fitbit, Facebook) and companies that were listed on the NYSE and Nasdaq.
For many months, Sagarmatha’s audit committee led by a highly respected and experienced board of directors, engaged with the professors of an accounting faculty of a prominent US university and a San Francisco based valuation company, Redwood Valuation Partners, who determined the valuation which was incorporated into the listing.
The JSE accepted this valuation, although it could be argued that regulators should not get involved with valuations and that it should be determined by the market.
Redwood was correct in that subsequent to Sagarmatha’s now withdrawn listing, many similar companies have listed in New York on the NYSE and Nasdaq with valuations in the billions of dollars and significant losses.
The Sagarmatha listing was scuppered after a determined, manipulative and dishonest disinformation campaign by Tiso Blackstar publications, especially Business Day.
This campaign was launched and focused on the inclusion of Independent Media (which was only 3 percent of Sagarmatha’s value in the listing).
Tiso Blackstar tried through their senior executives to prevent the inclusion of Independent Media in the Sagarmatha listing as they were hoping, through engagement with the PIC, to acquire some of Independent Media’s publications.
Their sabotage of the Sagarmatha listing was focused on Independent Media and not on Sagarmatha but, in doing so, misled the investor community, the public and caused even the JSE to review the listing.
Sagarmatha was a victim of this brazen manipulation of the public narrative and the JSE using a small technicality, wrote to the company four days before it was to list, to withdraw the listing.
The JSE claimed that the company was not compliant with the Companies Act by not having submitted its financial statements to CIPC from 2014 to 2017.
But the JSE was wrong. Sagarmatha was compliant as it did not need to submit those financial statements since it was within the threshold of the public interest score as defined by CIPC.
Despite receiving a letter from CIPC that Sagarmatha was compliant, the JSE pushed ahead with the withdrawal of the listing. To date, Sagarmatha has refused to get into a public spat with the JSE as we believe it serves no purpose.
It is regrettable that, at the time when the country needs significant investment, that corporate detractors can act in a criminal way to undermine a legitimate listing.
Sagarmatha’s international investors that have committed and who were part of the R4bn in commitments, were disgusted and it damaged the South African investor environment irreparably with some of the world’s most savvy and successful billionaires and investors.
Sadly, an opportunity to employ thousands of young South Africans was missed due to this corporate greed, and, some would argue, implicit racism in the narrative by the detractors, especially Business Day.
Had we as Sagarmatha known that the JSE would withdraw the listing on such a technicality, we would not have spent so many resources and wasted our time trying to list in South Africa.
Rather, we would have sold the business or alternatively requested permission from SARB to have a primary listing overseas. This is still a possibility and we have no doubt, that we will be vindicated by an international valuation overseas.
There also remains a consistent lie, peddled by our detractors, which claims that the PIC invested in Sagarmatha. The fact is, the PIC did not invest in Sagarmatha, at all.
Sagarmatha was able to successfully raise R4bn in committed capital for the listing from both South African and international investors, without the PIC.
On the eve of President Ramaphosa hosting one of the most important conferences in our country, ironically to be addressed by Jack Ma, the founder of Alibaba and tech billionaire, we need to reflect on this lost opportunity for Africans to own and participate in the global technology platform economy.
If we treat our entrepreneurs in the manner in which Sagarmatha has been treated, it will send a signal that only foreign companies should invest in and own, our technology platforms. Africa will be colonised all over again, except this time it will be a virtual colonisation, with all profits remaining outside the country, no taxes being paid and more opportunities being created for non-Africans.
Is this what we mean when we say South Africa is “open for business”? Surely not.
Dr Iqbal Survé is Executive Chairperson: Sekunjalo Group and an investor in Sagarmatha Technologies.