THE GROUP'S HUMAN CAPITAL COMPRISES A UNIQUE MIX OF INDIVIDUALS WHO ARE ABLE TO COMBINE ENTREPRENEURSHIP AND OPERATIONAL EXCELLENCE WITH A STRONG CULTURE OF DISCIPLINE
OVERVIEW
The group's 2005 performance has been the best in its history, in terms of strategy, execution and profitability. Our people are at the heart of this success, and I am very proud to say that the group's human capital comprises a unique mix of individuals who are able to combine entrepreneurship and operational excellence with a strong culture of discipline.
As indicated on page 1, all of the group's financial indicators for 2005 were positive, with free cash flow exceeding headline earnings, a trend consistent in recent years as the group has divested of its poor-performing international businesses.
STRATEGY
The group's vision is to become a world-class media group, incorporating advertising and content-based media. Achieving this status requires a continued and disciplined focus on the following principles:
- Investing in the right media businesses: This includes owning media assets that have high rights exclusivity, critical mass and that, on balance, target consumers who have greater spending capacity;
- Owning the right media assets: This requires investing into media sectors that will show long-term growth, can collaborate with one another (synergy) and have complementary economic cycles. With regard to the latter, advertising business tends to be more geared to the economy whilst content businesses are mainly "hit" or demand driven;
- Innovation: This discipline continually ensures the creation of new income streams and invariably market leadership; and
- Strong culture: A strong corporate culture that balances the need for structure and rigour with an enabling environment within which individuals can grow and lead with a degree of autonomy.
We believe that we measure well against these principles, and this makes us confident about our future.
2005 STRATEGIC PRIORITIES REVISITED
At the beginning of the 2005 fiscal, three strategic priorities were identified that would influence the group's financial health in the short, medium and long term, namely:
- Maximisation of the group's cash flow;
- Continued enhancements to the group's media portfolio, and in particular, further reducing 94.7 Highveld Stereo's contribution to group profitability to closer to the targeted 25% to 30% range; and
- Increasing black consumer patronage of our cinema and home entertainment products.
The group has made excellent progress with the first two strategic priorities:
- Cash flow management has been good, allowing the group greater flexibility in creating shareholder value through distributions, share buy-backs and earnings- enhancing acquisitions.
- In 2005, 94.7 Highveld Stereo''s contribution to group profitability reduced to 40% from 46% in 2004 (47% in 2003) and is expected to decline further to between 30% to 35% in 2006 due to anticipated growth from existing businesses and acquisitions referred to in more detail below.
The group's strategy of increasing black consumer patronage at its cinemas, through an affordable pricing strategy, has not met management's expectations in the short term, although black consumer attendance increased by 36% to 3 million, representing 19% (2004: 13%) of total customer attendances. The group remains committed to stimulating growth in this market segment.
GROWTH STRATEGY
The group's growth strategy has historically been focused on five key areas: organic growth, innovation, bolt-on acquisitions, geographic expansion into Africa and investment into new media sectors.
I can report satisfactory progress on all fronts:
Organic growth
The group posted a respectable 15,2% organic growth in PBIT from the core South African operations. PBIT from the advertising businesses grew by 18,0% to R249,9 million, whilst the PBIT from the filmed entertainment businesses was marginally up by 2,1% to R71,4 million, in spite of Ster-Kinekor's ongoing dispute with a supplier on product distribution. PBIT from the one to one businesses declined from R4,0 million to R2,1 million.
Innovation
The group has once again acquitted itself well in this key discipline, with a number of new innovations launched in the current year, as set out more fully in the detailed operational reviews. New revenue streams emanating from these initiatives will contribute to Primedia's results going forward with minimal capital requirements.
Bolt-on acquisitions
During 2005, the group spent R389,6 million on earnings- enhancing bolt-on acquisitions and in increasing its interests in subsidiary companies to secure greater access to their underlying cash flows. These included the following:
- 94.5 Kfm: 92,2% economic interest acquired with effect from 1 October 2004;
- Africa on Air (94.7 Highveld Stereo's licence holder): purchase consideration settled on 1 July 2004, for an additional 30,5% economic interest, taking the group's total economic interest to 85,8% (this transaction was however effective from 31 March 2004);
- Rank TV: group's shareholding increased by 34,0% to 100% with effect from 31 July 2004;
- Rank Branding: group's shareholding increased by 43,0% to 100% with effect from 31 July 2004;
- Primedia Sport: group's shareholding increased by 10,0% to 80,0% with effect from 1 July 2004; and
- 567 CapeTalk: group's interest increased by 56,25% to 100% with effect from 1 January 2005.
Subsequent to the year end, the following acquisitions were made:
- The group reached agreement, subject to regulatory approvals, to acquire the Mineworkers Investment Company's ("MIC") remaining minority interests in Africa on Air for a total consideration of R77,4 million, which will be settled by cash of R7,1 million and the issue of 5 962 385 Primedia "N" shares. This transaction was critical to the group's watershed empowerment transaction referred to below;
- ComutaNet acquired the business of its major competitor, GMR, a division of Altmedia (Pty) Limited ("Altmedia"). This acquisition should result in high levels of efficiencies given their similar operating footprints; and
- Primedia Outdoor acquired Altmedia's strategic holding of outdoor advertising sites at important airports.
The group has yet to complete the acquisition of New Africa Investment Limited ("Nail"), which controls 24,9% of Kaya FM, Johannesburg's leading black adult contemporary music radio station. Primedia is likely to acquire 65,0% of Nail and the purchase consideration for this will be approximately R13 million.
Expansion into Africa
The group operates in Africa through Primedia Outdoor's presence in Namibia, Botswana and Mozambique as well as through Ster-Kinekor's cinemas in Zimbabwe and Lusaka. These operations contributed a small 1,2% of group PBIT (R4,2 million) for the year. Longer-term, a reasonable objective would be for Africa to contribute at least 10,0% of group PBIT and strategic plans are being developed to achieve this goal.
New media sectors
Through Primedia Unlimited, excellent progress was achieved in investing into new media sectors. Whilst the primary focus is on new and growing sectors of the media industry in which Primedia is not currently invested, the investment criteria that govern decision making are as follows:
- Businesses must have a high degree of entrepreneurship;
- The businesses must demonstrate profitability, be scalable and have some track record (as opposed to start up); and
- Primedia must be able to add value to the businesses.
Primedia Unlimited Advertising concluded the following acquisitions in 2005, at a cost of R6,0 million, with a further R11,3 million payable in 2006 through the earn-out of warranted profits:
- Wide Open Platform (50,1%), which mainly specialises in unconventional advertising on construction sites, on buildings and at the airports;
- A+D Media (50,1%), now renamed Primall Media, which specialises in advertising in shopping malls and parking arcades;
- Forecourt Television Network ("FTN") (100%), now renamed Forecourt Media, which has 40 digitally linked LED screens at leading service stations through- out South Africa, and has a broader focus of selling media space beyond the LED screen to encompass the broader service station environment; and
- Primestars (50,1%), a new company established as a leader in cause-related marketing and the marketing of high profile speakers.
Subsequent to the year end, Primedia Unlimited Advertising made the following acquisitions, which could, on the basis that profit warranties are achieved, cost R41,7 million:
- The Letter Corporation (90,0%), which dominates the washroom advertising space in South Africa. This was also acquired from Altmedia;
- XProcure (80,0%), the leading electronic ordering system provider to the pharmaceutical industry, handling R3,0 billion of the R11,0 billion of merchandise purchased by pharmacies from pharmaceutical manufacturers and distributors. Whilst XProcure earns a small commission on facilitating transactions, the bulk of its revenue is made from advertising. Due to legal restrictions which prevent pharmaceutical companies from advertising scheduled drugs on mainstream media, the channel to pharmacies that XProcure provides is highly sought after by pharmaceutical manufacturers and distributors; and
- A further 9,9% interest in Wide Open Platform.
The group is firmly focused on growing its content-based activities and Primedia Unlimited Content is starting to gather momentum.
In the current year, the focus has been on the roll out of additional home entertainment stores in townships. This venture recorded a small operating loss in the 2005 fiscal.
After the year end, Primedia Unlimited Content acquired Book4Golf and is in the process of acquiring Airgames. These acquisitions will cost R10 million, with a further R20 million payable on the achievement of self-liquidating profit warranties. Both companies have very exciting prospects.
Convergence
In addition to these five growth strategies, due to the increasing opportunity for media companies to exploit content over an ever increasing number of delivery platforms as well as the opportunity to deliver advertising over such channels, the group has launched a sixth growth strategy convergence, which is more fully discussed below.
2006 STRATEGIC PRIORITIES
The 2006 strategic priorities are mainly a by-product of the growth strategies and are set out as follows:
Black consumer filmed entertainment
This is a carry-over from 2005 with its focus on accelerating the progress in growing filmed entertainment for black consumers.
Increase frequency of cinema attendance by traditional consumers
Research, as well as the results achieved by Ster-Kinekor's loyalty programmes, clearly indicates that the traditional consumer is sensitive to pricing in deciding to choose to go to the movies. The launch of the Ster-Kinekor Junction sites has been formulated around this need and the economic opportunity, as with that of the black consumer focus, is considered significant.
Achievement of critical mass for Primedia Unlimited
The group's strategy of entering into new growing sectors of the media industry has become a reality through Primedia Unlimited, which has a focus on both the advertising and content sectors. The group's objective for the 2006 financial year is to achieve annualised PBIT of R20 million from Primedia Unlimited Advertising. Minimal losses are anticipated from the content side of Primedia Unlimited.
Unlocking the value from the group's sport assets
This medium to longer-term strategy is two-pronged:
Firstly, Primedia owns 40,0% of Kaizer Chiefs football club, whose brand is the most recognised sports brand in South Africa by a big margin, as well as a very strong lifestyle brand. The supporter base of Kaizer Chiefs is estimated to be 14 million and its stature as a premium brand is recognised by most South Africans. The intention is now to start leveraging this brand through various brand extension opportunities.
The second opportunity is for Primedia to start positioning itself as the preferred media partner to corporate South Africa, ahead of 2010 FIFA World Cup. Interest by South African companies in this event has already commenced, with Megapro Marketing, South Africa's leading sports marketing company, securing eight of the twenty corporate sponsors of South Africa's bid to host the event. Going forward, the group with its broad range of media, is strategically well-positioned to benefit from the significant "back up" media spend by sponsors, in support of their "on the pitch" sponsorships.
Establishing a greater proportion of earnings from content
Content is considered a growth sector for media companies, particularly due to the increasing number of digital delivery platforms. Also, it is generally less cyclical than advertising-based media businesses. The group currently generates approximately 20% of its PBIT from its content businesses i.e. cinema exhibition, theatrical, video and DVD distribution and electronic games distribution. It is the group's longer-term strategy to increase this contribution through organic growth and diversification into new content businesses.
CONVERGENCE
Primedia is focused on the imminent changes to the legislative framework for broadcasting and telecommunications, as codified in the Convergence Bill, which, together with the developments in digital technologies, presents new challenges and opportunities for media owners in South Africa.
In order to accelerate the momentum in this area, Primedia has established a Strategic Digital Council to ensure that its broad range of media assets and brands will fully benefit from the digital era and the associated new revenue streams. In support of this, the group intends to forge partnerships and invest in businesses that will enable the delivery of our broadcasting, internet, filmed entertainment and electronic gaming content over new platforms and leverage the group's media brands.
BLACK ECONOMIC EMPOWERMENT ("BEE")
The group is proposing to facilitate an increase of Primedia's BEE shareholding to 20,3% through the issue of 8 million Primedia "N" shares at par value to Primedia's strategic BEE partner, MIC. This transaction represents one of the largest BEE transactions to be concluded in the media sector and, together with the group's continued focus on transformation, demonstrates its commitment to BEE and positions it for the current and future requirements of the Broad Based Black Economic Empowerment Act and applicable Codes. Primedia's transformation efforts will also ensure the preservation of its current businesses and competitiveness within the South African context. In addition to their significantly enhanced economic interest in Primedia, MIC will continue to exercise joint control over Primedia.
PROSPECTS
The group is well-poised for 2006 for the following reasons:
- The continued buoyancy of the economy should support the momentum in the advertising industry and drive operational leverage across the group;
- The high performing 94.5 Kfm will be consolidated for the full year as opposed to nine months in the 2005 fiscal;
- The Altmedia acquisitions will be accounted for from 1 September 2005;
- Primedia Unlimited will also benefit from the inclusion for the full year, of businesses acquired in 2005, as well as the contributions from the new acquisitions, The Letter Corporation and XProcure acquisitions will be accounted for from 1 September; and
- The group should also benefit from the execution of its five key strategic priorities for 2006, as well as its underlying group-wide growth strategy.
CONCLUSION
During the year, the group was privileged and honoured to have been nominated 'The Most Transformed Media Company' by Financial Mail/Empowerdex and 'The Media Owner of the Year' by Financial Mail/Adfocus in recognition of the great progress the group has made. The group's turnaround is due to the unwavering efforts of our courageous employees and continued support from our major stakeholders, to whom I would like again to record my sincere thanks.
W Kirsh
Chief executive
21 October 2005