When the MTN Zakhele trading platform opens on the 25th of November 2013, it is expected to project phenomenal success of the BBBEE scheme even as limited by its restricted trading platform. A price of about R100 per MTN Zakhele share is possible.
Coming alongside a sea of failed empowerment deals, due to inefficient funding structures, the MTN Zakhele story carries an important message: Where there is a will there is way.
MTN Zakhele’s initial investors entered the scheme at R20 a piece which represented 20% of the total value of the MTN Group shares. The balance was covered through a combination of preference shares, MTN donation and MTN vendor finance.
The idea was to position this cocktail of a security, MTN Zakhele, favourably to earn more equity via MTN Group share price appreciation and retirement of debt. All dividend received has been applied on retiring debt. The structure has worked like a charm.
Reports from the chairperson of the MTN Zakhele board, Thulani Gcabashe show this. At the end of the 2012 financial period, Gcabashe reported that the MTN share price has performed well putting the scheme firmly in the money. “When MTN Zakhele acquired the shares, the cost was based on a price of R107.46 per share…”
By 31 December 2012, the MTN share price had increased to R177.60…” Gcabashe added that “Dividends received from MTN have increased meaningfully over the years”. This allowed the scheme to retire a significant portion of its debt.
“The MTN dividends received during April 2012 and September 2012 exceeded the obligations under the preference share funding arrangements,” said Gcabashe. This enabled the Company to fully settle the Class B preference share balance in April 2012, which was originally R720 million. The dividends due to both the Class A and Class B preference shares were also settled”.
The Company also started partially settling the MTN Notional vendor finance (NVF) funding in September 2012…”
That was for the period ended December last year. The MTN Group share price has since appreciated further and is now flirting with R200/share. The interim dividend for the six months ended June is now in the mix.
Three independent analyst reports can be said to agree on one thing. The scheme can so far be declared a phenomenal success.
A report by UBS says “Our estimates suggest a fair value per Zakhele share of R137”.
We derive a fair value for MTN Zakhele of R137/share, based on the 4% stake it holds in MTN Group (and using our Group target valuation of R390bn). This is less the outstanding NVF and Preference A shares, to drive an implied equity value of R11.1bn for MTN Zakhele, with 80m shares outstanding”.
However UBS had a caution. “The look-through value may be limited. We do not consider that the MTN Zakhele OTC instrument will necessarily provide a particularly helpful look-through valuation for MTN Group, given the likely relative illiquid nature of the instrument. Nonetheless the initial price on the 25th November and the instrument’s trading patterns thereafter may be worth tracking.”
A report from RMB Morgan Stanley says “From an offer price of R20 per [MTN] Zakhele share in 2010, the mathematical underlying value has increased 7x to over R140 due to higher dividends and the appreciation of MTN shares”.
Adds the RMB Morgan Stanley report “[MTN] Zakhele shares will be subject to their own market dynamics including potential discounts for limited liquidity”.
A report by Renaissance Capital addresses a pertinent issue. The report says “We believe MTN Zakhele shareholders would like to know whether to hold their shares or perhaps sell them and instead acquire common MTN shares”
The report adds that “Compared with an issue price of R20/share, MTN Zakhele’s NAV advanced to R96.67/share by end-2012, or implied capital appreciation of 182%. On a comparative basis, the MTN share has appreciated by 71%. At this stage, our preference would be for MTN Zakhele shareholders to retain their shares for the duration of the Empowerment Period (which ends on 24 November 2016).”
It is important to note, as actually noted in all three analyst reports quoted here, that the indicated valuation of MTN Zakhele is largely academic. The actual trading price will be partly determined by the limited trading platform of the shares.