MTN: What next for Africa’s $17bn telecoms group?
The continent’s largest operator has struggled after a hefty fine in Nigeria. Now a new CEO aims to revive its fortunes
YESTERDAY by: Maggie Fick and Joseph Cotterill
As TV screens in Abuja flickered with footage of xenophobic mobs in South Africa attacking Nigerian-owned businesses, a group of angry young men sought revenge. But rather than attack the South African embassy in the Nigerian capital, they targeted instead the offices of Johannesburg-listed MTN, the biggest telecoms operator in Africa.
“South Africans insult us and they think they do us good,” says Aruna Kadiri, head of a student group involved in looting and vandalising the office. “We will survive on our own.”
The incident last month highlighted simmering tensions between the two most powerful countries on the continent. But for MTN it exposed something more: the problems it faces in its most important overseas market.
Days after the ransacking, MTN revealed its first ever annual loss, of R1.4bn ($107m). It came after an 18-month period in which its share price slipped 40 per cent, wiping $10bn off its value, largely due to its woes in Nigeria. On Monday a new chief executive, Rob Shuter, took over with the task of turning round the business, valued at more than $17bn, and bringing to an end what the company has itself described as the “most challenging” year in its history.
Crucial to that, for a company with a presence in many of the world’s toughest emerging markets, is Nigeria. Of MTN’s 240m subscribers, a quarter are in the west African country, driving a third of its $11bn sales last year.
Nigeria was once the engine of growth for a business viewed as a rare success story among black-owned and managed companies in post-apartheid South Africa. Now it stands as the clearest example of why MTN’s progress has stalled — underlined by its battered share price, which rises and falls in tandem with the volatile Nigerian currency and global oil prices.
MTN is still suffering the fallout from a $5.2bn fine levelled against it by Nigerian authorities in 2015, for failing to disconnect unregistered mobile lines. The prosecution exposed a failure of governance,as the company made ever bolder plays to bring mobile coverage to countries ranging from Iran — where it was unsuccessfully sued by a Turkish rival, Turkcell, over claims that it secured its mobile licence in the country corruptly — to Syria and Afghanistan. MTN denied the allegations.
In South Africa, which together with Nigeria makes up 70 per cent of the landline and mobile operator’s profits, subscriber growth has stalled, growing less than 1 per cent in 2016 to just under 31m. Vodacom, its local rival, briefly eclipsed MTN’s market capitalisation last year despite having only a quarter of its subscribers. The companies are competing to roll out lucrative mobile internet services to sell to existing users instead of chasing new ones, but the investment in data is expensive and MTN is racing to catch up.
“The fine was a symptom of wider problems both at MTN and for Nigeria rather than a cause of those problems,” says a telecoms analyst who has covered the company for years. “MTN had become complacent and was slow to adapt to a maturing industry and changing dynamics in Nigeria.”
MTN has invested more than $16bn in the west African country since acquiring a licence in 2001, when Nigeria had less than half a million landlines and was one of the least connected nations in the world. Over the next decade it enjoyed a period of explosive growth in mobile phone usage across Africa, and especially Nigeria. As the price of oil soared in the 2000s, so did MTN’s shares, from R21 in 2004 to a peak of R260 in September 2014 — just as the crude market collapsed, sending Nigeria’s oil-dependent economy spiralling into recession.
MTN’s crash back to earth in Nigeria was abrupt. In October 2015, just six months after taking office, the government of President Muhammadu Buhari fined the company the equivalent of more than double its projected net income for the year after accusing it of failing to heed an order to disconnect unregistered sim cards, some of which were being used by Boko Haram insurgents committing acts of terrorism in the country.
MTN paid the government $1.7bn to settle the case last year and agreed to list its local operation on the Nigerian Stock Exchange as soon as possible — likely to be 2018 at the earliest. For the Buhari administration the fine was a warning to companies operating in the country to obey the law. But a person familiar with MTN said the company had argued that the problem of unregistered sim cards could not be addressed until Nigeria had a functioning national identification system. MTN offered, says the person, to share its experience with sim registration in other challenging environments such as Syria.
“At the end of the day, from a security perspective, was anything learned?” the person asks. “They [Abuja] were just focused on the penalty, on punishment, not on learning lessons.”
MTN still has more than 50 per cent market share by subscribers in the country of more than 180m people, but the shockwaves from the fine, and the resentment toward the company as a symbol of South Africa are still being felt. It faces a fresh investigation by Nigerian lawmakers over alleged tax dodging and illegal repatriation of profits of $13.9bn in the decade to 2016. MTN has denied any wrongdoing.
Phuthuma Nhleko, the executive chairman who ran MTN during a period of explosive growth and drove its aggressive expansion into 22 countries across Africa, the Middle East and Asia, was asked to return as chief executive for an interim period until Mr Shuter’s arrival. He told investors earlier this month that the company would “hit the reset button”, including putting in place a “second layer between the group and the various countries at the regional level” to improve scrutiny of its operations.
Announcing the 2016 results, Mr Nhleko said “MTN is still the number-one brand” in most of the countries where it operates. “There’s a lot to leverage there.”
But it faces fierce competition not just in its home market but from other operators in Africa that have been quick to shift their focus to selling more lucrative mobile data rather than call-time.
- 240m Total MTN subscribers — 25% of whom are in Nigeria
- $11bn MTN sales in 2016, a third of which comes from Nigeria
- $107m 2016 loss reported by MTN last month, the first in its two-decade history
- $5.2bn MTN’s Nigerian fine in 2015. It paid $1.7bn to settle the case and agreed to list its local operation in Lagos
- $13.9bn Sum Nigerian lawmakers have accused MTN of illegally repatriating in profits in the decade to 2016
- $730m Estimated value of last year’s share scheme to raise black ownership of MTN above 30%
In Nigeria, MTN’s ability to roll out more of this data capacity is hampered by having to spend US dollars on expensive kit, such as towers, while earning weakened naira from its operations. The company’s earnings margin in Nigeria (before tax, interest, depreciation and amortisation) has fallen from more than 58 per cent in 2014 to below 47 per cent last year — underlining both how profitable the country has been for MTN, but also the difficulty it will have turning around operations while Nigeria’s currency continues to weaken.
“Nigeria is the number-one priority,” says a Johannesburg-based businessman close to Mr Nhleko. “Shuter has never been to Nigeria. His first [issue] is to understand the traditional prejudice of Nigerians against South Africans who they think behave like they can give lessons to the rest of Africa.”
The company’s importance in South Africa’s recent history cannot be overstated. Only one in 100 black South Africans owned a phone line when MTN was set up in 1994 — the year apartheid ended and Nelson Mandela was elected as president.
Bidding for the first mobile licences to be issued by the young democracy, the group, created by black empowerment company New Africa Investments, was in the right place at the right time.
The African National Congress government was just beginning to shift key industries away from white-minority ownership. MTN quickly became a byword for those advocating more black-owned or run businesses.
When it looked at international expansion, just four years after it launched, the South African government gave its blessing. Even today, precious few of the South African companies that have made the leap outside the country — mostly miners like African Rainbow Minerals — are black-owned.
Political support became even more obvious in 2009, when Pretoria’s Treasury blocked an attempt by India’s Bharti Airtel to buy MTN in a $24bn deal.
Today the company’s largest shareholder with a 16 per cent stake is the Public Investment Corporation, the investment manager for pension funds of mostly black government employees. And as it pursues a turnround, MTN is under pressure not to backslide on empowerment — epitomised by the reaction to the recruitment of Mr Shuter, a white South African hired from Vodafone’s European operation last year. It was described by the Black Management Forum, a lobby group, as “a serious blow to transformation” that showed a “lack of thoughtfulness” from MTN’s black directors.
MTN countered that “while transformation will always be important”, it also had to focus on innovation and remain competitive. The statement reflected the tension in being both an avatar of empowerment at home and a global company more than half of whose shares are held outside of South Africa.
The company has renewed a scheme to put more of its shares in black investors’ hands, offering a 4 per cent stake worth R9.9bn ($730m) to lift black ownership of the company’s South African operations above 30 per cent. That threshold, which includes indirectly held shares, would allow the company to bid for South Africa’s radio-frequency spectrum in an auction later this year — part of an effort to roll out access to faster internet services on its network and overcome slowing growth at home.
But questions persist over whether MTN’s status as a national champion is hampering its ability to recognise problems in international markets, and foster local executives to deal with them. In hiring Mr Shuter — and replacing other group board-level executives — MTN is trying to respond to shareholder criticism over its management of such risks.
“It is disappointing when our investee companies are found to have transgressed the law,” says Deon Botha, a PIC spokesman, adding that it had “engaged with management at MTN to impress on them that compliance with the law is a high priority and that their risk management should be strengthened”.
This could help the group learn and improve its relationships with regulators in other countries where it operates, observers say.
One Lagos-based lawyer familiar with the Nigerian regulators and MTN’s local business is more blunt. “The MTN corporate culture is from black empowerment in South Africa. Because of the apartheid days, all they needed to do was say [to the authorities], ‘look, we are black, we want a telecoms company’, and that’s it [they got it].”
Officials in Abuja stress they do not want MTN to leave Nigeria. “I would be an irresponsible minister if MTN is scared away,” says Adebayo Shittu, minister of communications. “We must give every company every protection, and when they go amiss, we beat them to order [punish appropriately]. But of course when you have a headache the solution is not to cut off the head.”
Data: MTN makes a digital pitch in a bid for future growth
While it grapples with a currency crisis and political fallout in Nigeria alongside a slowdown in South Africa — the two countries that drive its current profitability — other markets and sectors offer a glimpse of where MTN wants to be in the future.
It is the largest distributor of digital music in Africa; a fast-growing mobile lender in Uganda and Zambia; and in Iran — its second-biggest market by subscribers after Nigeria — the company owns stakes in both the country’s biggest e-commerce operator and Snapp, the homegrown answer to Uber.
Underlining the shift towards sectors such as mobile payments, the new chief executive, Rob Shuter, has a background in financial services, having worked for South African banks as much as in telecoms.
Although they remain small and largely lossmaking, it is these fast-growing digital operations that MTN would prefer investors to focus on. The shift to these services, away from traditional money-spinners such as selling voice airtime, is critical to MTN’s turnround. It also underlines how the data revolution is catching up with unwary players even in emerging markets, requiring expensive capital investment to stay ahead.
Television ads and billboards in MTN’s home market, South Africa, trumpet the 180m calls it places each day but also that its fourth-generation mobile network, offering faster data speeds, now covers 27m users.
Across the 22 countries in which it operates, MTN derived 27 per cent of its revenues last year from selling data, up from 23 per cent in 2015. In the relatively mature South African market, data’s share was 34 per cent, with MTN investing R11bn ($830m) in the country last year to expand capacity.
But two-thirds of MTN users in the country are still without smartphones, compared with half of the subscribers of Cell C, an aggressive smaller rival that is raising cash to expand. Rather than South Africa or Nigeria, the market where MTN has achieved most smartphone penetration is Iran, at more than half the nearly 48m subscribers in the country.
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