Will MTN buy into the second national operator (SNO), which is due to start competing with Telkom over the next year? History and some pointers say yes.
MTN isn’t saying. JSE Securities Exchange analysts think probably not.
A minority stake held by MTN — or a solid partnership between the two companies — would be a boon for consumers, however. Although the SNO will likely have its licence to operate before the end of July, it will initially focus on providing services to very large companies. If it leverages off MTN’s infrastructure, significant numbers of consumers could have access to its services.
New wireless technology combined with MTN’s national network and cellphone towers could deliver fixed-line type services, including broadband, relatively quickly, easily and cheaply. These services are very different from its current cellular offerings and would impact neither on a business nor a technology level; for MTN it would still be business as usual.
If MTN is interested in buying a stake — at the moment it is mum on the matter, offering only “no comment” — it could find a willing seller in parastatals Eskom and Transnet, each of which owns 15% of the SNO.
Both companies and the government executive they answer to consider the stakes to be non-core and a possible distraction from their important functions.
Transnet chief executive Maria Ramos announced an intention to sell non-core businesses, including telecommunications arm Transtel, which houses the SNO stake, shortly after she took over the running of the parastatal. The disposal has since been delayed, but is still on the cards, although executives were not available to confirm that this week.
Eskom has made similar noises even as its privatisation was put on the back burner. In a surprisingly blunt answer to questions, it said it was not talking to MTN and probably wouldn’t be in the foreseeable future.
“There has been a decision to concentrate on core business and the minister of public enterprise has indicated that several state-owned companies, including Eskom, would offload non-core assets,” said spokesperson Fanie Zulu.
“In the case of the SNO, we may take a different view. The SNO is a strategic national project and we wouldn’t just walk way from that; there would be a whole lot of things to consider, including national interest.”
Nonetheless, both Transnet and Eskom have written off hundreds of millions of rands of the money each invested in telecommunications infrastructure in the early days of SNO fever. Recovering part of that investment is an attractive proposition and selling all or part of their stakes is the quickest way to achieve that.
If MTN is not interested, one has to wonder why. In the early days of the SNO process, it expressed keen interest in the 51% stake that was up for grabs. It finally decided that it could not fund the investment because it was pouring billions into MTN Nigeria and was afraid of spreading itself too thin.
But it did not walk away entirely. The research MTN had done into the potential of the SNO was handed over to the Goldleaf consortium that did bid for the 51% stake with the proviso that MTN could later buy 5% of the SNO itself. Consultants that analysed the Goldleaf bid for the Independent Communications Authority of South Africa accused MTN of virtually writing the entire business plan.
The Goldleaf bid was rejected and MTN lost its potential entrance into the SNO. But does its subsequent silence mean it also lost interest? That seems unlikely; the only change since has been that MTN Nigeria is now a money-printing machine leaving MTN with a huge pile of cash which it is under pressure to invest. In its last financial year, the company generated R12-billion in cash and at the end of the period it had hoarded R6,4-billion in cash. The acquisitions announced this week, in Côte d’Ivoire and Zambia, should come in at less than R1-billion.
MTN has a number of good reasons for wanting a board seat on the SNO. The planned acquisitions in Africa it announced this week are relatively minor given its resources, still leaving it with too much cash.
Telkom and its half-owned Vodacom are planning to bundle services and that would leave MTN vulnerable in the top end of its market. There might even be money to be made out of the SNO, eventually.
Analysts have urged MTN to stick to its tried-and-tested cellular model, but it has not always done so: it operates as the SNO in Uganda. And in a press statement released with its annual results earlier in June, CEO Phuthuma Nhleko hinted that the company could look outside mobile telephony this year.
“In line with our vision to be the leader in telecommunications in developing markets … we will continue to explore value-enhancing international expansion. Business opportunities complementary to the core mobile telephony business will also be pursued,” he said in the statement.
The biggest pointer against this is that MTN has not run the idea of an SNO investment past shareholders and analysts. Then again, that may not be necessary.
“I would rate [an SNO investment] as negative for MTN because it would dilute the return it earns,” said technology and telecommunications analyst Irnest Kaplan. “Not that it would be majorly negative; it wouldn’t be a train smash.”
Kaplan said an investment running into hundreds of millions of rands would not be big enough to raise concerns. “If they say that this [the SNO] is their engine for future growth, then I would start to worry.”