Risk means MTN’s price still doesn’t look cheap
THERE was a flutter of excitement among dedicated MTN watchers following the release of a Sens statement last week just minutes before the market closed for the Easter weekend. The statement said a company called M1 Ltd had built up a 10.01% holding in MTN.
A Google search showed that M1 is a Singapore-based cellphone company, sparking speculation that MTN was now in play. Was a robust investor with a high tolerance for risk going to take advantage of MTN’s troubles to accumulate, comparatively cheaply, a strategic block of shares?
Further research revealed there was no cause for excitement. The M1 Ltd buying MTN shares was not a Singapore company but the Lebanese group that had sold Investcom to MTN in 2006 for $5.5-billion.
Following that deal, M1 emerged as one of the largest shareholders in MTN with a 9.91% stake — until March 22, when it took its holding to just above 10%.
So what is the likelihood of anyone making a bid for Africa’s largest cellphone company?
Although international investors seem to have lost their appetite for African financial assets, fast-moving consumer goods might be different. If African beer consumers can hold allure for international investors, why not cellphone users?
“Not when there’s so much uncertainty around Nigeria,” was the conclusion of 36ONE’s Jean Pierre Verster.
Whatever the price advantage caused by the Nigerian debacle, there was too much risk for what would be a multibilliondollar investment.
MTN has no controlling shareholder and, say company sources, there is no control pool agreement. The Government Employees Pension Fund is the largest shareholder with 16.63%, followed by the M1 stake. Any party interested in making a bid would have to get one or both of these investors on side.
Analysts believe beer may be the exception that proves the rule in terms of lack of interest in Africa. For foreign investors, difficulties on their home patches, including lacklustre econom- CAUTIONARY COLOUR: The list of countries where MTN does business reads like a US State Department travel warning map ic growth, combined with the slump in commodity demand, has killed much of the urge for exciting (read “high-risk”) African investments.
And few come with higher risk than MTN. The map of the group’s global operations (Africa and the Middle East) in MTN’s latest annual report (2014) looks like a US State Department travel warning map. Several of MTN’s biggest markets, including Nigeria, are currently the subject of such travel warnings.
Indeed, the State Department’s explanation for issuing a travel warning reads as though it could be the source document for MTN’s growth strategy. STICK TO BLACK LABEL: Jean Pierre Verster
“We issue a travel warning when we want you to consider very carefully whether you should go to a country at all. Examples of reasons for issuing a warning might include un- stable government, civil war, ongoing intense crime or violence, or frequent terrorist attacks,” it says.
Just what MTN is looking for as it competes against betterresourced companies for a share of the global market. The risks that scare off travellers are the same ones that generate high returns.
Verster said MTN internationalised the most effective way it could and in the process created an extremely profitable business.
“They went where they could go” was how one of MTN’s BEE shareholders described the growth strategy, adding: “We’re only now fully understanding the risks of that.”
Certainly there’s little in the group’s annual report pointing to the sort of problems it’s facing in Nigeria. It talks of its vision being supported by robust governance structures and processes.
Ironically, in its 2014 annual report MTN ranked “adverse regulatory changes or noncompliance with laws and regulations” as its No 3 risk, after network performance and the need to create and maintain a competitive performance. The board was persuaded management had “formalised a compliance system to enable operating companies to proactively manage and respond to key local regulatory requirements”.
That compliance system was obviously seriously flawed. The Nigerian version of South Africa’s Regulation of Interception of Communications Act came into effect in March 2011, and the deadline for the registration of existing sim cards was March 2012. All sim card registrations had to be completed by August last year.
MTN obviously misread the level of the Nigerian government’s determination.
The various deadlines passed and in August MTN still had 5.1 million unregistered subscribers. Even when the Nigerian regulators slapped a $5-billion (about R74-billion) fine on MTN that month, it seemed the company wasn’t taking things too seriously. It was only when the Nigerian media reported the fine a few weeks later that MTN felt it necessary to inform shareholders.
Last week’s reports that a Nigerian politician had called for a doubling of the fine cast a shadow over the earlier reduction, after months of negotiation, to $3.9-billion.
The white-knuckle ride will continue for shareholders until MTN issues a firm statement about the resolution of the problem. And after that shareholders will always be wondering which of MTN’s adventurous destinations will be the next to boil over.
There may be too much adventure in MTN for any but the most intrepid investor to believe a 39% fall in the share price makes it a cheap buy.
And there aren’t many intrepid investors around these days.