With absolutely no fanfare, MTN’s Zakhele Futhi (MTNZF) BEE deal has been unwound, leaving behind some disenchanted shareholders who won’t have learnt much from the R10.6bn exercise other than that only a select few do actually benefit from empowerment deals. That select few generally includes the financiers.
And as it happens, this time around, the financiers have been paid in full. They receive their capital back, plus interest.
The broad-based BEE (BBBEE) shareholders, the people for whom the MTNZF scheme was created, are not so lucky.
Given that the unwind decision came just weeks after the Supreme Court of Appeal (SCA) ruled against MTN in the Iranian matter, it’s tempting to suspect a link. A link that MTN CEO Ralph Mupita stresses does not exist. “The unwind decision was independently made by the MTNZF board,” he tells Currency.
To say the scheme was a disappointment would be an understatement. As things stand, there’s a good chance the empowerment shareholders won’t even recoup the R20 a share they invested six years ago. They’d have been better off putting their money in the Post Office or under a mattress.
And it’s not as though they picked up any dividends along the way. The payouts made by MTN on the 76-million shares (equivalent to 4% of MTN) owned by MTNZF were soaked up by costs every year.
Insult to injury
Those costs were mainly related to paying dividends on the preference shares used to partially fund the acquisition of the 76-million MTN shares, as well as redeeming some of those preference shares. Additionally, there were the costs of running MTNZF.
Just look at what happened in the 2024 financial year. That year, MTNZF received R253.5m in dividends; it then forked out R135.8m to repurchase preference shares and used R61.8m to pay operating expenses (up from R19m in 2023), which included eye-popping legal and professional fees of R38.7m (up from R4.6m). The legal battle with Nedbank might explain the enormous increase.
Is it any wonder the MTNZF shareholders have received no dividends whatsoever?
Now, adding insult to injury, the MTNZF board has unilaterally decided that the whole thing must be shut down. And that’s pretty much what has happened. First up, MTNZF sold almost 24-million of its MTN shares, and, in a somewhat oblique Sens announcement, informs shareholders that the estimated R3bn in proceeds will be used to settle the remaining preference share funding, taxes and unwind costs.
When that is all sorted, MTNZF will “distribute the balance of the proceeds to the MTNZF ordinary shareholders at the appropriate time”.
Meanwhile, MTN repurchased 50.6-million MTN shares from MTNZF to settle the “notional vendor financing” it had provided for the deal back in 2019.
Heavily geared deal
The company reckons that after it has sorted out the various funders and other costs, the net asset value for MTNZF is expected to be between R2.47bn and R2.78bn, “which translates to an NAV per MTNZF ordinary share of between R20 and R21.50”. That’s the balance of the proceeds referred to above that will be distributed to shareholders.
But it could be a while before even that meagre sum can be banked by the empowerment shareholders. The MTNZF board intends to pay a dividend of at least R15 a share “in the near term” – vague enough.
After that, the board will determine the best way to return the residual cash, ranging from R5 to R6.50 per MTNZF share, to shareholders. Then MTNZF will be delisted from the JSE, wound up and deregistered.
It’s a fittingly grim end to a pointless BBBEE exercise. Consider its sad history. In 2019, the empowerment shareholders paid R20 per share to acquire a stake in a company that held 76-million MTN shares.
It was a heavily geared transaction that benefited from the 20% discount at which MTN allocated the shares to it. The big empowerment boost came from the funding provided by preference shareholders and the notional vendor finance provided by MTN.
It meant that the R2.5bn provided by the empowerment shareholders could be beefed up to a company with about R10bn worth of MTN shares. The hope, as in all BBBEE deals, is that the underlying shares will perform sufficiently well to ensure the empowerment shareholders can bank some profit from the gearing, after the financiers have been paid.
However, following eight years of fairly dismal share price performance from MTN (due to Covid and various multinational controversies), MTNZF shareholders will be lucky to recover their original R20 investment.
Why now?
Two things are galling the empowerment shareholders – this is a geared equity investment, which means it needs time to show returns, so why was it unwound so suddenly? And why were the interests of the funders given such preference?
One disgruntled empowerment shareholder tells Currency he’s perplexed at the suddenness of the decision to unwind the scheme.
“Why are they cashing out two years before the scheme closes. Do they know something we don’t know about what’s ahead for MTN?” he wonders. Could it be that right now the financiers are covered, so it’s a good time to kill off the scheme?
A more benign interpretation of MTN’s motivation might relate to the seemingly never-ending legal battle with Turkcell of Iran.
Could it be that, following the SCA’s ruling that South African courts have jurisdiction in Turkcell’s bribery case against MTN, the company fears its share price may come under prolonged pressure? And, is it perhaps unwinding the scheme to shield its empowerment shareholders from further value destruction?
The first sign that something related to an unwinding might be on the cards was a May 23 Sens announcement detailing what was owed to the various funders, and an “illustrative example” of how this could be paid. That Sens announcement came just weeks after the SCA ruling.
Then, from a June 11 Sens announcement, it was apparent this “illustrative example” was being put into action.
No clarification
MTNZF hasn’t actually provided its empowerment shareholders with an explanation. In fact, it hasn’t offered any enlightenment at all other than the glib comment on June 11. “The board, in the exercise of its discretion, has determined that this is an opportune time to fully unwind the scheme and settle its funding obligations.”
It’s important to point out that while all of this seems cavalier and might thoroughly disappoint MTNZF’s shareholders, there’s nothing illegal about what’s going on.
Just last October, the very same shareholders gave the MTNZF board the authority to unwind the company at any time and, for whatever reason, it chose to exercise this authority. It hardly matters that only 40% of the shareholders attended the meeting at which this approval was granted.
They gave the authority at the same time they approved the scheme’s extension from November 2024 to November 2027. Having given that approval, it is likely that few MTNZF shareholders expected the scheme to be unwound just seven months later.
As for any plans to replace this BBBEE scheme, well, don’t hold your breath. MTN’s chief sustainability and corporate affairs officer, Nompilo Morafo, tells Currency: “There are currently no plans to introduce a new BBBEE scheme, for now. MTN continues to explore ways to support transformation and inclusive growth. Any further initiatives will be aligned with MTN’s strategic priorities and communicated transparently to stakeholders at the appropriate time.”
The sort of meaningless corporate-speak you’d expect from a company that has just abandoned its slightly poorer, broad-based black empowerment shareholders. Or a company that reckons the less information made public, the better.
This story has been updated with comment from MTN CEO Ralph Mupita.
Top image: Rawpixel / Currency collage.
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