MTN’s Nigerian roulette
Three years ago Africa’s biggest mobile operator was hit with a heavy fine in Nigeria; now it’s in trouble again
MTN, which has had little to celebrate so far this year, has been granted a few crucial reprieves over the past two weeks.
It’s no exaggeration to say that this year has been a baptism of fire for CEO Rob Shuter — who joined from Vodafone in March last year — and it will certainly be one to forget for investors in Africa’s biggest mobile operator.
After MTN managed to put out fires in Benin and Cameroon, US President Donald Trump reinstated sanctions on the company’s third-biggest market, Iran, leading to fears that R3.4bn of MTN’s cash may remain trapped there for years. Then, the body blow: authorities in MTN’s largest market, Nigeria, slapped demands worth a combined $10.1bn on the operator.
MTN was told to send $8.1bn worth of dividends back to the West African country and, for good measure, it then handed the dazed company a $2bn tax bill. While some analysts are adamant that the oil-dependent nation is unfairly targeting MTN to bolster its finances ahead of elections next year, the impact on the share price has nevertheless been brutal.
By mid-September, MTN’s stock had dipped below R70 for the first time in 12 years, following a 35% fall in three weeks. At those levels, its Nigerian business was essentially worth nothing to investors, despite accounting for a third of the group’s earnings. Such weakness in the stock also, inevitably, made MTN a possible takeover target for a global operator keen on an emerging-market arm.
But since the dark days of last month, a few small chips have fallen in MTN’s favour.
First and most critically, the Central Bank of Nigeria has softened its tone on that $8.1bn demand. The monetary authority said on September 19 it was leaning towards "an equitable resolution". It said it is now "in talks" with MTN and the operator’s four banking partners there — including Standard Bank’s local unit — as the parties had provided "additional information which is being reviewed".
MTN’s argument all along has been that the central bank’s claim that its dividend repatriations consisted of illegally converted preference shares was spurious, as the funds it moved were linked to ordinary dividends.
Fola Abimbola, an analyst at Lagos-based CSL Stockbrokers, tells the FM the central bank’s demand is likely to fizzle out as "all indications point to a blunder on the central bank’s part".
He says: "There’s definitely no way the regulator will continue to push for the $8.1bn repatriation by MTN ... What I think may happen is that in some closed-door meeting the issue will be resolved quietly between all parties."
The second factor in MTN’s favour is that Nigeria and other oil-rich nations in MTN’s portfolio are benefiting from a resurgence in Brent crude prices. The oil price has lifted from about $71 a barrel in mid-August to $85 on Tuesday. This, of course, could relieve Nigeria’s fiscal pressures and, fingers crossed, move MTN out of its crosshairs.
Along with a weaker rand versus the naira, and news that the EU could help MTN free up its Iranian cash pile, a "reasonable outcome" in Nigeria could push MTN’s stock back above the R110 level, says Mergence Investment Managers portfolio manager Peter Takaendesa. To the fury of the Trump administration, the EU is creating a new payment mechanism to allow countries to transact with Iran and circumvent US sanctions.
These small victories mean the market no longer values MTN Nigeria at zero.
Already, MTN’s shares have recovered somewhat, reaching R89.66 on Tuesday — the best level in a month.
But the market valuation of MTN Nigeria "is still far from its clean fundamental valuation due to the fact there is still no visibility on what Nigeria is trying to achieve by coming up with such unprecedented demands", Takaendesa says. "It’s a good sign for Nigeria as a country, and MTN, that the central bank is now trying to resolve the issue, but the point is that investors do not fully understand why the demands came up in the first place."
Takaendesa says because the market has yet to hear more about the auditor-general’s hefty tax demands, it is "reasonable" that MTN Nigeria remains undervalued.
In a new report, stockbrokerage JPMorgan says its conservative R86 price target for MTN’s stock is based partly on the assumption that the operator will reach a $500m settlement with Nigerian authorities next year.
But while "meaningful downside risks may still exist", JPMorgan says these have been tempered somewhat after Standard Bank’s Stanbic IBTC, which moved $2.6bn out of Nigeria for MTN, confirmed that it would not be forced to pay that money back to the central bank.
Nevertheless, JPMorgan points out that relations between MTN and Nigerian regulators are "fragile".
Even in SA, MTN’s second-biggest market, there is concern that the open-access agenda of President Cyril Ramaphosa’s government "may undermine MTN’s historical investment".
Here, JPMorgan is referring to the latest version of the Electronic Communications Amendment Bill, which says Vodacom and MTN should be forced to open their networks to competitors. The bill says a service provider with "significant market power", or at least 25% of SA’s network infrastructure, must share its infrastructure with competitors.
The Independent Communications Authority of SA is to prescribe the "cost-oriented" rates these operators can charge their rivals.
It’s yet another battle that awaits MTN at home. But before it even gets to that, Shuter will want to resolve the Nigerian fiasco. Either way, 2018 has been a brutal reality check for investors, who have been made to realise that because of MTN’s footprint across 23 high-risk emerging markets, it’s often going to be a case of one step forward and two steps back.