After the publication of its annual report this week, the headlines focused on former chief executive Sifiso Dabengwa’s R23.7 million ‘golden handshake’ following his resignation in November amidhn the MTN Nigeria fine fallout. We also learnt that chairman Phuthuma Nhleko, who assumed executive responsibilities after Dabengwa’s departure, was paid R5 million for just 53 days work (or, more correctly, 37 workdays). Of course, there was the far bigger story of MTN aiming to repatriate at least $1 billion from its operations in Iran.
I argued in July last year (Ten things you didn’t know about Vodacom) that there’s a lot more in these documents than disclosure around executive remuneration…
1.) Dabengwa’s wasn’t the only golden handshake
The collateral damage from the rather enormous regulatory problem in Nigeria meant the resignation (“mutual separation”) of country boss Michael Ikpoki, who was paid R17.26 million as “compensation for loss of office”. In a footnote, it says this is for “severance, leave and lifestyle benefits”. Zunaid Bulbulia, who also left the group by “mutual separation”, was paid R13.254 million. This compensation is described as “severance, restraint of trade and gratuity pay”. Bulbulia was one of the founding members of the business, and most recently was group chief operations executive (he had a 13-month stint as CEO of MTN South Africa in 2013/2014).
2.) Only 1 in 7 subscribers uses data
MTN has 32.4 million “registered” data users across its group operations. This shows just how much opportunity there is to grow data usage (and smartphone penetration), given that its total subscriber base is 232.5 million. Despite this relatively low penetration, data revenue is now nearly a quarter (23%) of its total, with this segment growing by 32.6% in 2015. Data traffic more than doubled in the year (+108.5%). The “effective data tariff” (price per MB) declined by 45% in US dollar terms. Key to it replacing the long-term erosion of voice revenue will be the extent to which it can drive data adoption among subscribers. Imagine if it can get that number to 50 million in the next year….
3.) It’s betting big on e-commerce
MTN owns 41.4% of its e-commerce joint venture African Internet Holdings (AIH), together with Rocket Internet, Millicom and Orange (along with minorities Axa and Goldman Sachs). During 2015, it committed an additional €135 million investment to increase its shareholding in a financing round. In 2014, it paid €168 million for 33.3%. It also owns a stake in a similar joint venture, Middle East Internet Holdings (MEIH). There was a 34 cents per share impact (loss) from these investments in 2015 (from a 7c a share loss in 2014). That equates to a R620 million knock. It discloses an overall loss for AIH and MEIH in the year of R1.511 billion. It says AIH “recorded” 2.3 million customers and 4.4. million transactions in the year.
4.) Mobile Money is not that big
MTN says it increased the number of mobile money customers by 56% to 34.7 million in the year. Nearly one in three of these subscribers is in Uganda (9.5 million), which is not surprising given the regional boom in East Africa, thanks largely to Safaricom. Vodacom’s Tanzania operation is seeing similar traction. It’s next largest markets are Ghana (5.7 million) and Nigeria (6.2 million). The former is impressive, given its total subscriber base of 16.2 million; the latter far less so (61.3 million total subscribers). In South Africa, the number of mobile money users is 4.5 million (13% of the base). It remains small relative to its operator business, at 17% of revenue in Uganda and 6% in both MTN Ghana and MTN Rwanda. Using these data points, mobile money is a R865 million business in Uganda, a R474 million one in Ghana and a R90 million one in Rwanda. That’s nearly R1.5 billion (generously, call it R2.5 billion across the group). Not bad, but not massive in the context of R160-odd billion in total revenue (barely 1%, 2% if you’re generous).
5.) Sustaining elevated levels of capex in South Africa
In 2015, MTN almost doubled capital expenditure in South Africa (from R5.67 billion in 2014 to R10.95 billion last year). It added 966 2G, 1593 co-located 3G and 3148 co-located LTE sites in the year, with the co-location of these sites a noticeable departure from its strategy. It spent almost as much on its network in SA as it did on Nigeria, Iran (49% share) and Ghana combined. This year, it aims to invest R7.9 billion in its network, as it continues to recover from years of underinvestment.
6.) Billion-rand currency swings
In its sensitivity analysis, MTN estimates what a 10% change in the three main currencies it’s exposed to will mean. A 10% weakening in the dollar/rand exchange rate from December 31 2015 will mean a R1.256 billion decrease in group profit before tax (the converse, for a 10% strengthening, also obviously applies). A 10% weakening in the dollar/naira exchange rate translates into a R862 million decrease in profit before tax. But, a 10% weakening in the Iranian real/rand exchange rate means a R1.029 billion increase in profit before tax. Given the currency moves in 2015, with broad weakness across the board in emerging markets, the effect of weakness (or strength) of either the naira or real is effectively double this year, when compared to a year prior. When it comes to conversions back into rand, a 10% move from levels as at December 31 equates to almost 10 times (!) the effect from a year earlier (R1.256 billion vs R144.8 million).
7.) It got its Altech Autopage base for a steal
MTN paid R640 million when it acquired its Altech Autopage subscriber base from Altron TMT (R30 million less than the original R670 million price, due to an adjustment based on the size and quality of the base at closing). Of this amount, R212 million was goodwill. By comparison, it paid R1.246 billion (nearly double!) for its Nashua Mobile subscriber base just a year earlier (of which R525 million was goodwill). Sure, the Nashua base was perhaps better quality, but this shows the extent of the value destruction by Altron given its dilly-dallying on Autopage (Did a brave face cost Altron R1bn?).
8.) Smartphones, 3G numbers don’t quite add up
MTN says it has 51.9 million 3G-enabled devices on its networks, but the number of smartphones in its four largest markets exceeds this number, at 52.2 million (and this obviously excludes smartphones in its other operations, which sees fairly erratic disclosure). Based on the numbers we have, it wouldn’t be a stretch to see over 60 million smartphones on MTN’s network. But, this would mean that about 10 million of these devices are not 3G-enabled. Could there really be this many legacy devices (like BlackBerry Curve 8520s) in use?
MTN’s largest smartphone markets:
- Iran – 26.4 million (+57% of its total subscriber base)
- Nigeria – 15 million (±25% penetration)
- South Africa – 7.6 million (±25% penetration)
- Ghana – 3.2 million (±20% penetration)
9.) Listings on the horizon in Nigeria and Ghana?
MTN says it “continued to evaluate opportunities and appropriate mechanisms to ensure broader local ownership, including in key markets such as Nigeria”. One school of thought (that I’ve advocated since last year) is that a settlement with Nigerian authorities on its regulatory fine would include a commitment to list its local operations on the Nigerian Stock Exchange. However, MTN cautions that “market conditions and the operating environment need to be conducive before any listing is pursued”. It has 12 months to resolve its ownership structure in Ghana, given that operation “must have a minimum of 35% Ghanaian ownership in place by January 2017”. Listings, anyone?
10. ) Its tax affairs are complicated
MTN discloses that it paid R6.032 billion in tax in South Africa during 2015. This includes corporate tax, indirect taxes, payroll taxes, operating licence (and regulatory… cough… that fine…) fees, withholding taxes, property rates, transfer duties, as well as dividend tax, and is down from R6.322 billion in the prior year. In total, the group paid R39.8 billion in tax, with the R9.3 billion provision for its regulatory fine in Nigeria behind the 31.7% year-on-year increase (exclude the provision and its tax ‘contribution’ would’ve been flat for the year). In the context of the Base Erosion and Profit Shifting (Beps) programme being led by the Organisation of Economic Development (OECD), finalised in 2015, it does flag that there’s “increased focus in the media and in the public domain on the tax and transfer pricing position of multinational enterprises… including MTN”. It also defends its 115 employees in Dubai (MTN International) , which it says “some may argue is a tax haven”, and says these employees “perform a range of services including procurement, IT and financial services”.
* Hilton Tarrant works at immedia. He can still be contacted at email@example.com.