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.
September 14, 2016 at 2:16 pm
I’ve asked about 10 brokers and fellow traders for a view on this yesterday and no one could give me a definitive answer. I stumbled across your post after someone had stuck it on my LinkedIn. Really enjoyed it, thanks.
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September 14, 2016 at 3:07 pm
Thank you for the feedback Nick. Unfortunately there are few commentators that cover these public offers…glad you enjoyed it. Craig
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September 15, 2016 at 7:07 am
Thanks Craig for insights.
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September 15, 2016 at 2:38 pm
Was waiting expectantly for your take on this. Thanks for the insights.
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September 22, 2016 at 12:03 pm
@Craig, Does MTNZF work primarily the same as MTNZ. I read the prospectus and the NVF accrues interest at 80% of prime. Does this balance get reduced with MTN dividends. In Zakhele I think the MTN divs accrued to Zakhele at 110%. Is this still true for MTNZF. Am I mistaken
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September 27, 2016 at 6:00 am
Hi Keten.
Dividends from MTN are used to settle the NVF. The NVF does attract interest, as they all typically do. Mtnzf is similar to MTNZ in many respects, except for the empowerment period, divi policy, and terms of the debt funding; NVF and the pref shares make up that debt funding…
Craig
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September 28, 2016 at 8:51 pm
Hi Craig,
I am bit confused on the MTNZF Preference Shares part of the funding, where would the money originate from…So if I understand correctly the funding structure goes as follows:
1. Equity (from public and MTNZ Re-investment) – This is the R20 contribution or conversion of existing MTNZ share holders.
2. Upfront costs and working capital – Transactions costs from Investment banks, legal etc. to structure the transaction.
3. MTN discount (20%) – MTN providing discount to buyers, discount is upfront with no future payments i.e. not a loan just discount on the value of the stock
4. MTNZF Preference Shares – I need this to be explained!!!
5. Notional Vendor Financing (NVF) from MTN – MTN funding the deal expecting dividend generated by MTN Group to pay the funding back over the set 8 year period (Essentially a loan from MTN).
Does point 4. suggest that the current outstanding MTN Zakhele would essentially fund the new MTNZF Preference Shares for a set period (5 years i think i read somewhere) with expectation of receiving first dividend and should any issue arise during the period of the transaction they would have preference of he holdings of MTN Group?
If not who would fund these preference shares and how would they impact the holding of the MTNZF shares?
I currently hold MTN Zakhele shares and I have bought more at around R58.00 and I am not fully sure how they will be converted to MTN Shares if the current price is standing at +-R120.00
{Please pardon my lack of knowledge in this sphere…I am self taught investor}
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September 28, 2016 at 9:24 pm
Hi Lerato
The MTNZF pref shares are loans provided to MTNZF by three banks. They buy these pref shares, and earn interest from them. So they provide the money to MTNZF and earn interest, and get their money back after 5 years.
MTNZ does not finance MTNZF prefs. The only connection between MTNZ and MTNZF is that some MTNZ shareholders may convert their MTNZ shares into MTNZF shares. That’s all.
The way MTNZ converts into mtn shares is that you will receive MTN shares to the value of your MTNZ shares. There isn’t a one for one conversion there.
Feel free to ask your questions, that’s why the blog is here…
Regards
Craig
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October 1, 2016 at 8:44 am
Hi Craig
For shareholders who bought MTN Zakhele at R122 what would be the best option considering that MTN is at R58?
I understand that if you bought MTN Zakhele at R20 you may consider electing to receive MTN shares however the conversion rate is unknown. I am not sure if rollover to Futhi would be better?
What are your thoughts on MTN recovery?
I think shareholders who entered later and facing a loss, are in a tough situation.
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October 1, 2016 at 8:49 am
Hi Scout. Investors that bought in at R122 would probably be invested for less than 2 years while those who paid R20 have been invested for 6 years. I’d say rollover into MTNZF and extend the investment term. Yes it is ‘blind’ but that is a part of the investment game. MTNZ shares are probably worth more than R58. The value at which MTNZ rolls over is not determined by the price of MTNZ rather the intrinsic value when the exchange happens.
Craig
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October 15, 2016 at 5:42 am
Any idea on what value the mtnz will be converted to mtnzf? Or any idea on how that value will be determined prior to conversion to futhi
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October 15, 2016 at 7:13 am
No idea at this stage. They use the Volume Weighted Average Price for the 30 days ending 18 November. It will be the value of MTNZ that they use to convert to MTNZF not the MTNZ share price
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January 20, 2017 at 1:31 pm
Hi, I bought MTN Zakhele Futhi shares a few months ago but had a few shares on my MTN Zakhele profile which I could not transfer to MTN Zakhele Futhi so I elected for a cash pay-out in October for these remaining shares. I am honestly frustrated at this point with the call centre as no one has any idea what happened to my payment. Every week I call to follow up and every week the call agents send me back and forth for documents at the bank. At first i was told my banking details could not be verified and my payment was rejected in December so i had to get an updated certified ID copy AND proof of banking details with a bank stamp so i can receive payment. Yesterday i am told that my payment was actioned in December and if i have a query i must send through my bank statement with a bank stamp so they can action this payment. Every week I call an wait 30 minutes on the phone before an agent can attend to my calls. I am seriously disappointed that this is the kind of service i receive as an investor in such a reputable company like MTN. I have wasted alot of time, money and energy on this pay out and i need to speak to someone who knows what they are doing even if its the CFO. Who can I speak to that is very senior to assist me with this issue?
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