MTN’s blessing in disguise
Asharper focus on its home continent could be just what MTN needs to reclaim its position as Africa’s secondmost valuable mobile phone company and its biggest by subscribers. The company unveiled plans last week to withdraw from the Middle East, rightly scaling back its ambitions to become one of the major players in emerging markets.
Outgoing CEO Rob Shuter follows in the footsteps of companies such as Standard Bank, which has been reversing a strategy to turn itself into a top emerging markets lender after entering markets such as Russia and Argentina. Bar the Covid-19 impact, which is widely accepted as a black swan event, Standard CEO Sim Tshabalala’s pivot back to Africa is paying off. In the 2019 financial year, Africa’s biggest lender by assets held up operations outside its home market as the bright growth spot.
The region delivered a more than 50% jump in headline earnings, more than 13 times the rate of growth at home, where it makes about 70% of its sales. Sure, the Covid-19 economic contagion will crush these numbers when it reports its half-year results later in August, but no market, including home, is safe.
It makes sense for MTN to refine its strategy and pull the plug on markets that have proven to be more trouble than they are worth. Until last week it seemed committed to its emergingmarket strategy, and few would have thought it was about to exit Iran, its third-largest market.
The company makes just more than 4% of its R64.1bn annual core profit — or earnings before interest, tax, depreciation and amortisation (ebitda) — in the Middle East, a region that comprises conflict-ridden countries such as Yemen, Iran, Syria and Afghanistan. But the cost of operating in these nations has been enormous, especially for shareholders. Shares in MTN, valued at about R117bn, have dropped more than three-quarters from their peak in 2014, wiping off tens of billions in equity.
With a market cap of R177bn, Kenyan rival Safaricom is now behind Morocco’s Itissalat Al Maghrib and Vodacom as Africa’s third-biggest mobile telecom group despite MTN boasting more than seven times more users.
Furthermore, legal battles in the Middle East have not only tested the commercial logic of keeping some of these businesses, MTN’s reputation as the poster child of SA’s post-apartheid commercial success has been tarnished as well.
The company is facing a lawsuit brought by families of US troops killed or wounded in battles with the Taliban in Afghanistan. The families accuse MTN of funnelling money into the Islamist group that has launched insurgent attacks on US soldiers.
That comes on top of MTN’s efforts since 2012 to defend its position after Turkish rival Turkcell slapped it with a $4bn lawsuit accusing it of using bribes and corruption to win a mobile operating licence in Iran. Though MTN denies any wrongdoing, the case, which is stuck in legal procedural wrangling, has further tainted the SA company’s image.
As Iran is subject to US sanctions, MTN is unable to repatriate its share of the earnings from the joint venture.
What’s the point of clinging to markets that give a company so many headaches and yet provide such an immaterial contribution to the bottom line? Shuter, who will step down in March 2021 after four years at the helm, rightly figured there is none.
Like Standard Bank, MTN could find that the rewards of refocusing its attention on the rest of the continent soon outweighs the cost of operating in problematic markets such as Nigeria.
With a coherently laid out plan to branch out into mobile financial services, which has been the driving force behind Safaricom’s breakneck growth in East Africa, and determination to win an operating licence in Ethiopia, one of the world’s last closed telecom markets, MTN’s earnings north of the Limpopo should be more than enough to restore what will be lost in the withdrawal from the Middle East.
IT MAKES SENSE TO PULL THE PLUG ON MARKETS PROVEN TO BE MORE TROUBLE THAN THEY ARE WORTH