Gardee analyses MTN Zakhele – postponed trading disappointed, but its value appreciation certainly hasn’t

The MTN Zakhele share scheme has been in the news for all the wrong reasons. Its often postponed listing has left more than 100 000 shareholders frustrated at not being able to trade. Such is the lack of confidence among service providers that the latest update is trading will start “sometime in January”. These postponements aside, the scheme has been a roaring success with investors enjoying fabulous returns. Riaz Gardee, a chartered accountant who loves applying his knowledge to the investment field, was the first person to make me aware of the superb investment opportunity available through tailored BEE share schemes for historically disadvantaged South Africans (HDSAs). He sent me a piece on the subject a few years back and I’ve paid attention ever since. In today’s excellent contribution, he runs his slide rule over the latest MTN Zakhele information – and comes to some pithy conclusions that will assist not only those thinking of cashing in their chips, but for other HDSAs considering investing in the scheme once its listing eventually happens. – AH

riaz-gardeeBy Riaz Gardee*

Shareholders who participated in the MTN Zakhele BEE scheme have made an astounding return in excess of 55% per annum over the last 3 years. Ayoba to that!

MTN has frequently applied broad-based empowerment models over the years which were open to the public thereby allowing the intended beneficiaries of BEE to participate in the formal economy. MTN is a pioneer in broad-based BEE having already had many public offerings since its 1997 Ikageng scheme. The Ikageng scheme created phenomenal value for the previously disadvantaged participants who at the time acquired these shares for around R2.50 each and now hold them at R216 each. Ayoba to that!

During 2010 MTN structured and facilitated yet another BEE transaction whereby the public was invited to purchase shares in MTN Zakhele. MTN Zakhele is not to be confused with MTN as it is a totally separate special purpose company with its primary asset being 75.4m MTN shares representing c. 4% of MTN’s equity. In addition to the equity contribution of R20 per share raised by Zakhele at the time loans were also raised to fund the deficit in order to purchase these MTN shares. The Zakhele asset value is thus the market value of the MTN shares it owns less these liabilities; the magic number shareholders should be looking at.

Restrictions and trading

After allocating the Zakhele shares in 2010 shareholders were subject to an initial 3 year trading restriction whereby the shares could not be traded at all. In November 2013 this trading restriction lapsed and shareholders could now trade but restricted to eligible previously disadvantaged individuals or groups. An over-the-counter trading platform was set up to facilitate trade in Zakhele shares; For the next 3 years it is only accessible to previously disadvantaged individuals or groups and thereafter the restrictions will be lifted in November 2016. It is likely that at that point the Zakhele company will be unwound by repaying all liabilities and returning the remaining MTN shares to the Zakhele shareholders. Hopefully the trading platform will be up and running before November 2016 as it has constantly crashed since going live in November 2013 with all trading subsequently halted. The trading platform is expected to go live once again sometime in January 2014. So what should shareholders do once the platform re-opens and how does the last Zakhele trading price of R80 relate to the MTN share price?

Transaction dynamics

Zakhele had assets of c. R15bn (75.4m MTN shares x November share price of R190/share) and liabilities of c. R4.8bn. The Net Asset Value (NAV) or ‘magic number’ per Zakhele share was thus c. R117/share during November 2013. Any increase or decrease in the MTN share price will thus have a direct correlation to this so at the current MTN price of R215 the magic number is R140/share. The following table summarises this concept:



Sensitivity Analysis

MTN Share Price





Zakhele Magic Number (Net Asset Value)





Zakhele Trading Price


Discount to Magic Number



So why is the Zakhele share trading below NAV? One of the key reasons is the share has trading restrictions for another 3 years and thus less liquid. Currently it can only be traded on the over-the-counter platform with other BEE participants. If there were no restrictions the Zakhele price would trade close to its magic number which will happen once these restrictions lapse in November 2016. Furthermore dividends received by Zakhele over the next 3 years from MTN for its 75.4m MTN shares will be utilised to repay the outstanding debt thereby reducing the R4.8bn debt by 2016 and increasing the magic number. Shareholders will benefit further as it is anticipated that dividends paid by MTN will increase over the next 3 years.

The key determinants of Zakhele’s price are therefore:

  • the debt outstanding by Zakhele,
  • the time period remaining for the restrictions to lapse,  and
  • the MTN share price.

The first two are known variables and the third one can be reasonably estimated.

MTN has been a stellar South African success since its formation in the mid-1990’s capturing emerging markets all over Africa and the Middle East. From its small beginnings its market cap is now one of the largest on the JSE and even exceeds Anglo American which for many decades was the dominant company in South Africa. MTN’s main markets by EBITDA are Nigeria (40%), South Africa (26%), Iran (5%), Ghana (5%), Cameroon (3%) and Ivory Coast (3%). It operates in 20+ markets and often #1 or #2 in those markets many of which are considered high growth regions. Based on current earnings projections and growth forecasts there should be strong support for the MTN share price at current levels and probably even higher over the next 3 years.

The way forward

As the restrictions lapse the Zakhele share price should move closer to its NAV. If you do not need the cash urgently then it would be better to wait for the restrictions to lapse and if you have excess cash then acquire more shares at current R80 levels. Buying the Zakhele shares at R80 and exiting at R141 in 3 years would imply an incredible return of 20% per annum for the next 3 years and this requires no increase in the current share price at all. Ayoba to that!

* Riaz Gardee is a Chartered accountant who specialised in mergers & acquisitions and corporate advisory for a number of years. In recent years he has been working on expansion and development of businesses in sub-Saharan Africa. He has written financial columns for various [email protected]
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