South African corporates have been under pressure to share equity in their businesses with the previously disadvantaged through share schemes exclusively for black investors. Along with this, an industry has mushroomed around structuring these deals. As the disappointing MTN Zakhele Futhi listing on the Johannesburg Stock Exchange demonstrates, sometimes these transactions are so complex that it is impossible for ordinary investors to understand the potential risks. Meanwhile, the various advisors surrounding these transactions seem to benefit. Ryk de Klerk, a respected independent analyst, puts the MTN Zakhele Futhi JSE debut under his microscope, concluding that uninformed investors were taken to the cleaners in an opaque arrangement. First published on Business Report. – Jackie Cameron
MTN Zakhele Futhi’s debut on JSE: Uninformed investors taken to the cleaners
By Ryk de Klerk*
MTN Zakhele Futhi’s debut on the JSE on Monday last week has left investors fuming. The share hit a low of 82 cents and ended the day at 480 cents and some 64,000 shares traded at a value weighted price of 309 cents. On Tuesday the nearly 33,000 shares traded at a volume weighted price of 939 cents but has since recovered to close at 1,800 cents on Friday.
MTN Zakhele Futhi was established in 2016 as a ring-fenced, special purpose vehicle (SPV) through which qualifying members of the Black Public could indirectly invest and hold shares in MTN Group. Investors paid R20 per share in 2016 and were locked in for 3 years. The SPV followed the previous SPV, MTN Zakhele, which delivered returns to investors of more than 20% per year until the duration of the SPV came to a close in 2016. The poor performance of the shares has left black investors in the shares disillusioned and disappointed as by the close on Friday their investments were down by 10% from what they paid in 2016.
But how much is a MTN Zakhele Futhi share worth? To be honest, unless you have the necessary systems and skills it is extremely difficult to estimate the underlying value of MTNZF at any given point in time apart from the official numbers supplied in the SPV’s financial statements at the interim and final stages of the financial years.
MTNZF’s investments in MTN consist of 51.114 million MTN Group shares and a derivative instrument. The derivative arises from the implementation of the MTN Group BBBEE scheme, where as part of the scheme MTN Zakhele Futhi obtained notional vendor finance (“NVF”) to facilitate the purchase of MTN Group shares. MTN Group issued 25 721 165 NVF (MTN) shares to MTN Zakhele Futhi (MTNZF) and MTN Group has a call option against MTN Zakhele Futhi in respect of the shares included in the NVF facility.
It is straight forward to calculate the value of MTNZF’s direct holding in MTN shares.
MTNZF raised third-party finance through issuing preference shares (maturing in 2 years from now and subject to certain covenants) and service the dividends owing to preference shareholders and reduce the capital portion of the debt through dividend income from MTN. The debt is effectively backed by MTNZF’s MTN shares.
The value of the derivative instrument is the most difficult to ascertain as it is based on a valuation model. Inputs in the model include MTN’s share price, interest rates on borrowings, price volatility, the outstanding period of the option and dividends generated by MTN during the life of the option (for the technocrats – the Monte Carlo simulation is applied as the valuation technique).
To simplify the calculation I used the net asset values of MTNZF as per the available financial reports at the interim and final stages. The NAV’s comprise all the assets and liabilities and include the options. The net asset values were then divided by MTN’s share price to calculate MTNZF’s effective holdings at the end of each financial period.
The effect of the option on MTNZF’s effective holdings given certain levels of MTN’s share price since 2016 is clearly visible. The sensitivity is such that a R20 change in MTN’s share price results in a change of 2.4 million shares in MTNZF’s effective exposure to MTN. Future dividend receipts from MTN and the closer the option gets to expiry will have a direct impact on MTN’s effective exposure in future.
I estimate MTNZF’s current net asset value at approximately 2,140 cents per share at the close on Friday based on MTN’s closing price of R92 on Friday and a net exposure of 28.7 million MTN shares. With MTNZF’s price of 1,800 cents at the close it indicates that the share is trading at a discount of 16% to its estimated underlying value
Although those who invested in MTNZF in 2016 at a price of R20 per share may feel unhappy as they are down by 10% on what they paid, they should see it in perspective. At the transaction date in November 2016 MTN was trading at R114 per share but in terms of the transaction MTNZF (and therefore their shareholders) got the MTN shares at around R90 per share.
The limitations placed on the trading of MTNZF shares may impact on the tradability of the shares and could lead to abnormal volatility compared to MTN. I do, however, think that the discount of the MTNZF’s share price to the underlying value will range around 10 percent to 15 percent as those who are allowed to invest in the shares are likely to look for arbitrage opportunities between MTN and MTNZF.
I am very concerned, yes, even extremely disappointed, that the JSE, sponsoring brokers, corporate advisors and even MTN could have allowed the trading as it happened on Monday and Tuesday. It is clear that uninformed investors or their managers were taken to the cleaners while others reaped substantial benefits. I sincerely and strongly recommend that those transactions be reversed and that the share prices for those two days be removed from all data bases. Some of the relevant parties got fat fees but they lacked responsibility with the debut of MTNZF.
- Ryk de Klerk is analyst-at-large. Contact [email protected]. His views expressed above are his own. He has no direct exposure to the companies mentioned. You should consult your broker and/or investment advisor for advice.
