MTN Group CEO Phuthuma Nhleko has just staked his claim on the future of his company in the boldest manner possible.
With the recent announcement that he is to purchase R266-million-worth of his company’s shares, he has — as an analyst who declined to be named put it — told the market that not only does he believe the company will do well in the next three to five years, but “he intends to lead the company through that phase”.
The shares are to be paid for in 18 months’ time, and will further entrench Nhleko’s status as the largest private shareholder in the MTN Group.
Since taking over from Paul Edwards in 2002, he has led the group with astute quietness and rather frustrating inaccessibility, choosing rather to let glowing numbers and acquisitions do the talking.
The announcement comes just as the share price has been under pressure. The strain was brought on by the news that MTN would acquire Lebanon’s Investcom for R33-billion. The deal immediately brings into MTN’s portfolio 11 new countries in Africa and the Middle East, leading observers to wonder if the company has not taken on too much too soon.
The deal also represents a fifth acquisition in six months. Last year, MTN made acquisitions in Zambia and Côte d’Ivoire. In the former it was through the acquisition of Telecel Zambia, and in the latter through an acquisition of a 51% share in Telecel Côte d’Ivoire. MTN also became a 49% shareholder in Irancell and, in December, the group purchased Libertis Telecom of Congo-Brazzaville.
According to a Merrill Lynch research report, between January last year and May this year there were 24 major acquisitions in emerging-market telecoms. MTN was a player in five of these, making it the most active.
Economist Brian Kantor is a noted sceptic on foreign expansion. He believes that growth prospects, especially at present, are more attractive at home and that shareholders need to be convinced of foreign acquisitions. He cites Barloworld’s lukewarm success in foreign adventures as an example. It also brings to mind SAB’s name-changing acquisition of Miller.
SABMiller has spent the past few years trying to sell the idea that the Miller turnaround is on track, a story that shareholders are only now begrudgingly beginning to buy into.
MTN would do well to heed the advice of not ignoring the local market. Its first-quarter results show that locally it lost 36 000 subscribers in the quarter to March to stand at 10,9-million, the decline being in the lucrative pre-paid market.
But Merrill Lynch expects the company still to achieve growth to 12,3-million subscribers in South Africa this financial year.
On the rest of the continent, the group enjoyed 8% subscriber growth to total 24-million, excluding Investcom.
For MTN, the Investcom acquisition has one similar characteristic to the SABMiller deal: it makes it more unlikely that MTN will be taken over by another operator. It also represents a major leap in prospects.
Investcom takes the number of countries in which MTN has a presence from 10 to 21, and takes subscribers from 24-million to 28-million from a population of 488-million.
The deal strengths include a complementary footprint and a management presence in the Middle East, as well as tremendous growth potential.
The most significant driver of growth for Investcom is its low penetration. In Sudan, for example, Investcom has a penetration of 7%. Other countries that Investcom brings to the table include Benin, Liberia and Guinea Bissau, as well as Syria and Yemen in the Middle East, and a licence to operate in Afghanistan.
Merrill Lynch has reflected that the deal “was not cheap, but makes long-term sense”.
At a cost of $5,5-billion, it represented a 27% premium on the Investcom closing price on the day before the deal was announced earlier this month. Merrill Lynch believes this “reflects the scarcity of quality assets” and was to prevent a competing bid being tabled.
The deal is seen as heightening MTN’s risk profile, given the conflict-ridden countries it adds to its portfolio, but it also adds diversity. One aspect worth noting is that the group could have concluded the deal in cash, but chose to combine a share issue and cash to leverage its balance sheet.
In August this year, MTN will launch Irancell ahead of schedule. The operations, like those in Nigeria, are expected to break even within eight months of commercial launch.
Credit insurer Coface gives Iran a B rating, describing it as “moderately high risk”. It cites an “unsteady political and economic environment” that is likely to impact further on an already poor payment record. Its strengths include its status as second-largest oil producer in the Organisation of Petroleum Exporting Countries and, with the second-largest gas reserves after Russia, it is a developing non-oil sector. Its major weaknesses are its dependence on oil income, discord in international relations and a “legislative and legal framework that makes it difficult to partner with local companies”.
Irancell might also help MTN catch up to Egypt’s Orascom, which has 30-million subscribers, two million more than MTN Investcom.
The outlook for the group remains buoyant. Merrill Lynch recently revised its earnings forecast from R4,82 to R5,11. Dividends for the coming year have been pushed up 18% to R1. Next year’s earnings, though, are expected to decline by about 1% because of the expiry of the tax holiday in Nigeria.
Sadly, this deal does not prevent MTN from being taken over by a global player looking to complete its footprint or a company like China Telecom. All it has done is reduce the number of potential suitors. Whoever would like to take hold of MTN will pay a hefty premium, and the biggest beneficiary of that will be none other than Phuthuma Nhleko.