Riaz Gardee: MTN swaps ‘Zakhele’ for ‘Futhi’ – a disappointing BEE deal

Corporate BEE schemes are nothing new to JSE-listed companies. Phuthuma Nathi, MTN Zakhele and Sasol Inzalo are a few of the well known ones. And the primary goal is to help with empowerment requirements, which vary dependant on industry. The one in question is the MTN Zakhele scheme, which will now be replaced by the MTN Zakhele Futhi. The scheme will help MTN meet black ownership targets required for a radio frequency spectrum licence application. The group is selling a 4 percent stake to black investors in a deal worth R10bn. Some commentators feel these schemes are the biggest untold corporate fraud of South Africa’s democratic era. Riaz Gardee doesn’t go that far, but in his assessment says the proposed deal is disappointing and the discount doesn’t warrant the required holding period. – Stuart Lowman

By Riaz Gardee*

Johannesburg based multi-national mobile operator MTN announced the salient terms of its new BEE deal, MTN Zakhele Futhi. Further details will be released when the scheme opens on the 12th of September allowing existing and new BEE shareholders the opportunity to apply for shares until the 21st of October. JSE listed MTN Zakhele owns almost 4% of the R240bn MTN, also listed on the JSE, and proposes to unwind when its 3rd party debt matures during November 2016. MTN Zakhele was launched in 2010 with an equity contribution of R20 per share from BEE participants and is currently trading around R65 implying a respectable 20% per annum compounded annual growth for the 6 year period. MTN has concluded a number of value enhancing and ground-breaking BEE deals since the1997 Ikageng share scheme but the latest proposal does not appear to be as promising as the previous initiatives.

Options

MTN Zakhele Futhi offers MTN Zakhele shareholders 3 alternatives:

  1. Cash settlement, based on the net asset value of MTN Zakhele;
  2. MTN shares to the equivalent value of the cash payment above; or
  3. reinvest part or all of the above cash proceeds into MTN Zakhele Futhi at R102.80 per MTN share (representing a 20% discount on the recent MTN trading price of R128.50).

Option 3 would also be open to interested BEE participants who do not own any MTN Zakhele shares.

Structure

The following is an overview of the proposed deal structure having a 70:30 debt:equity gearing ratio.

Futhi Component R/share R’bn %
Equity 32.1 2.5 25
Discount 25.7 2.0 20
3rd Party Debt 30.8 2.4 24
Notional Vendor Loan 39.9 3.0 31
Total 128.5 9.9 100

The proposed transaction structure is similar to the existing Zakhele structure with the key difference being the lock-in period. The proposed Futhi lock-in period will be 8 years compared to Zakhele’s 6 year period. No trading will be allowed for the first 3 years with restricted trading amongst black participants for the 5 years from 2019 to 2024.

A customer leaves an MTN shop in Johannesburg April 10, 2012. REUTERS/Siphiwe Sibeko

Considerations

Investors will have to consider MTN’s prospects over the next 8 years up to 2024 as well as the ability of the management team to deliver in the current phase of the company’s life cycle.

Sasol also offered investors a funded and unfunded BEE share in 2008 with a discount of 24% on the unfunded share at the time. Investors could not trade it for the first two years and for the remaining 8 years only trade it with other black participants. The share is currently trading at a 17% discount to the underlying Sasol share after 8 years which highlights the illiquidity and tradeability discounts of restrcited shares.

In essence MTN is providing shareholders with a 20% discount on its shares in exchange for holding them until 2024 with restricted trade from 2019 onwards. The proposed discount does not seem to warrant the required holding period unless the investor is expecting exceptional share price growth in MTN over the next 8 years.

Alternatively Zakhele shareholders could retain exposure to MTN without any discounts or restrictions. However should exposure to MTN no longer be desirous then the option to invest the cash where better growth is anticipated over the next 8 years is also available.

  • Riaz Gardee is a mergers & acquisitions specialist, financial writer and contributor to various media platforms including print, online, radio and television.