The long awaited announcement of the new MTN BBBEE deal happened on 22 August. MTN and MTN Zakhele (MTNZ) both announced that MTN Zakhele Futhi (MTNZF) would replace MTNZ deal post the unwinding of MTNZ in November 2016. The black public is invited to apply for shares in MTNZF while MTNZ shareholders have an option to convert all or a portion of the MTNZ shares to MTNZF shares.

Administration issues

The prospectus became available on 12 September 2016, and investors have until 21 October 2016 to submit their application forms and deposit their funds. Investors can either download the prospectus from www.mtn.com/zakhelefuthi or pick one up at a participating Nedbank branch. Investors can also complete the application form online or contact 083 900 6863 if they need any assistance with the application process. It is important to note that investors must not sign the application form until they are requested to do so in a Nedbank branch. Nedbank will request FICA documents (copy of ID, proof of address, and proof of banking). Funds need to be paid across by 18 October 2016, while cash deposits (maximum amount of R24,999) need to be made by 21 October 2016.

Deal structure

The empowerment period is 8 years, with no trade possible in the first 3 years. Restricted trade between qualifying black investors will be possible in the last 5 years. The deal will not happen if less than R1.24bn is raised between the black public and MTNZ shareholders opting for the Re-investment offer.

The MTNZF deal is similar to the MTNZ deal in many ways especially with regard to transaction funding. The funding structure is summarised below:

Source of funding R’millions Weighting Per MTN share
Equity (from public and MTNZ Re-investment) 2,468.3 25.00% R32.12
Upfront costs and working capital (R39.4) (0.4%) (R0.51)
MTN discount (20%) 1,974.7 20.00% R25.70
MTNZF Preference Shares 2,418.5 24.50% R31.48
Notional Vendor Financing (NVF) from MTN 3,051.2 30.90% R39.71
Total 9,873.2 100.00% R128.50

Given the similarities between MTNZF and MTNZ in capital structure, perhaps there will be similarities in the returns achieved by both deals. MTNZ has delivered a return of over 200% since inception in 2010. The one key difference between the funding structure of MTNZF and MTNZ is that there is refinancing risk presented by the preference share funding. The preference share funding is for a period of 5 years, after which it will be either renegotiated with the incumbent preference shareholders, or with new funders. It presents both a risk and an opportunity, if the debt is refinanced on more attractive terms. This is not a deal breaker as the preference share funding comprises 24.5% of the deal. The debt covenants do not appear unreasonable, although a 25% drop in the MTN share price could pose a significant challenge in this regard.

MTNZF directors will have discretion from year 4 onwards to pay a dividend equal to a maximum of 20% of the dividend income they receive from the MTN shares in MTNZF. This is an improvement on the MTNZ deal which did not allow for dividends during the entire empowerment period. Many MTNZ shareholders complained about the lack of dividends from MTNZ.

MTN: The investment case

MTN finds itself in a tough place at the moment. For the six months ending 30 June 2016 it reported a headline loss per share of 271 cents, which was down from earnings of 654 cents in H1 2015. While the Nigerian fine was a significant factor, there were other issues surrounding joint ventures and touch economic conditions in key markets. The company experienced a 48 hour network outage in SA in February 2016. Major risks include increased competition in key markets, political risk in Nigeria in particular, the economic outlook for Nigeria given low oil prices, and reducing voice revenues.

On the positive side the company still has the largest footprint in Africa, which could make it a takeover target for one of the larger global networks. There is strong growth in wireless data and broadband, and capital expenditure is expected to slow going forward.

There is a new management team that will be taking up the challenge of driving the company forward. The market seems to be optimistic that they will deliver the needed turnaround strategy.

Conclusion

Investors have essentially been given a second bite at the proverbial cherry with this deal. MTNZ was a success despite the fact that the MTN share price is largely where it was when the MTNZ deal happened. This is testimony to the funding structure which proved resilient in the face of challenges. The MTNZF deal has a very similar structure.

Investing is about taking risk, and the risk that investors could lose their entire investment remains. It is a risk that I am willing to take for myself, my wife and my kids, but I will not be betting the farm on this one.

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