MTN’s empowerment scheme failed to fly

MTN’s decision to have a share placement at the same time as its new black economic empowerment (BEE) scheme was just one of several reasons the BEE scheme flopped.
MTN’s empowerment scheme failed to fly
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This was the view of a BEE fund manager on Tuesday, 29 November, after the cellphone group announced it had raised R2.3bn through the placement of 21-million shares. The money will be used to pay MTN Zakhele shareholders who are cashing in.

Although the placement volume was small, it was another factor contributing to the generally bearish sentiment around MTN and helped to explain why the new MTN Futhi scheme failed to raise the modest R2.5bn targeted.

BEE schemes are not meant to be free, but they are meant to be sufficiently attractive to ensure success. Even the recent ridiculously overpriced DisChem initial public offering was seven times oversubscribed. The take-up of the MTN Futhi offer fell R500m short of its R2.5bn target – a 20% shortfall.

Analyst Riaz Gardee described the latest MTN BEE scheme as far less promising than the group’s previous initiatives. “Investors will have to consider MTN’s prospects over the next eight years as well as the ability of the management team to deliver in the current phase of the company’s life cycle,” said Gardee, alluding to the much tougher operating environment.

The scheme was rushed, it was unnecessarily complicated and it was badly priced, said the fund manager. The dismal results of the scheme represent an appropriately awful end to a truly annus horribilis for a cellphone company that for so long could do nothing wrong.

But in 2016, MTN continued to battle to persuade the Nigerian government not to impose a staggering $3.9bn fine for issuing unregistered SIM cards. And it was a year in which it struggled to appoint executives capable of rescuing its reputation from the selfinflicted damage in Nigeria.

Share price volatility throughout the year marked it as an inappropriate time to launch a new BEE scheme. That the MTN board did not opt to roll over the existing MTN Zakhele scheme for an extra year or two was probably the first mistake. At the planning stage, the MTN share price was at about R130; the board may have felt it was worth the risk and that there was no need to set a fixed price. But by the time the offer closed, the share had worked its way down to R112. For MTN Zakhele shareholders who had invested R20 back in 2010, the R112 at which they were going to be bought looked grimly disappointing.

By the end of 2014 MTN was trading at R250. For aspiring MTN Futhi shareholders, the group’s grim recent history did little to encourage an investment that will be locked for eight long years. Those who could afford to and were prepared to convert from MTN Zakhele into MTN Futhi were faced with a dauntingly complicated process.

“It was a nightmare for us and we’re reasonably sophisticated,” said the fund manager. “The lawyers were allowed to run rampant and the resulting documentation must have discouraged a lot of potential applicants.”

It may be the MTN board is still too focused on its Nigerian troubles to give its South African transformation requirements the necessary attention. MTN did not respond to requests for comment on the MTN Futhi take-up.