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MTN’s empowerment scheme at risk of turning sour for black investors

MTN’s empowerment scheme at risk of turning sour for black investors
Ray Mahlaka
By Ray Mahlaka
19 Aug 2024
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The 23% tumble in MTN’s share price over the past eight years has created debt woes for the company’s B-BBEE share scheme. Shareholders in the scheme might see their investment go sour if it is not extended for three years.

MTN wants its Broad-Based Black Economic Empowerment (B-BBEE) share scheme to run for another three years, which will buy the telecommunications giant more time to deliver value to anxious investors.  

By 23 November 2024, the B-BBEE share scheme — called MTN Zakhele Futhi — would have ended, paving the way for black investors to walk away after being invested for eight years. 

On Monday 19 August, MTN proposed that Zakhele Futhi be extended until 23 November 2027, an extension that is set to help the B-BBEE share scheme pay off the smothering debt that was used to launch it on 23 November 2016. The extension would possibly help Zakhele Futhi realise some value from a recovery in the MTN shares it owns.

Zakhele Futhi’s fortunes are dependent on the performance of MTN’s shares on the JSE, which have tumbled by 23% over the past eight years, implying that value has been destroyed in the B-BBEE scheme, which is also unable to pay its full outstanding debt. 

When the scheme was launched, MTN’s share price was trading at R128.50 but it has since crashed, hovering between R86.73 and R90.17 in recent days. This is a reflection of challenges faced by MTN in its South African home market (heightened competition for customer spend and Eskom blackouts), and tax troubles in Nigeria, a big market for the company. 

The devaluation of Nigeria’s naira has also affected MTN’s financial situation, which has spooked investors and led to the underperformance of its share price. On Monday, MTN posted a financial loss after tax of R9.67-billion during the six months ending June 2024, compared with R4.43-billion profit a year earlier.

Read more: MTN pours billions more into network to boost resilience to Eskom’s rolling blackouts

Read more: After hefty fines from regulators in Nigeria, MTN’s gamble in West Africa pays off

Debt woes for Zakhele Futhi 


The drawcard of Zakhele Futhi was that black investors were invited to buy shares in a scheme that exposed them to MTN Group and its profits from South Africa and the rest of Africa.

This was because Zakhele Futhi has a 4% shareholding in MTN Group (equivalent to 76,835,378 issued shares), which is the B-BBEE share scheme’s only underlying asset. Zakhele Futhi bought MTN shares at a 20% discount (issued at R102.80 instead of the R128.50 trading price), sweetening the B-BBEE share scheme’s proposition.

Zakhele Futhi’s purchase of a 4% stake in MTN, worth about R7-billion in November 2016, but now nearly R1-billion less, was funded through debt — mainly notional vendor financing (money lent by a company to prospective investors) of R3-billion from MTN and commercial banks injected R2.4-billion.

Zakhele Futhi’s debt is above R5-billion (about R6.7-billion), which it currently pays through dividends it receives from MTN. This debt had to be repaid when Zakhele Futhi was initially intended to end in November 2024.

MTN has estimated that Zakhele Futhi can only be in a position to settle the full debt when MTN’s share price on the JSE reaches R88 and exceeds these levels on a sustained basis. However, in recent months the share price has been volatile, making it difficult for  Zakhele Futhi to settle its debt and be unwound. 

At a media briefing on Monday after the release of MTN results, the company’s CEO Ralph Mupita said the devaluation of Nigeria’s naira had been a significant drag on earnings, which was also a consideration for the proposed extension of Zakhele Futhi for three years. Mupita said the MTN board was “fully supportive of the extension.”

No choice but to extend B-BBEE scheme


Arguably,  Zakhele Futhi shareholders have no choice but to agree to the extension because if they don’t, their scheme would be forced to end in November 2024 and immediately pay back the debt. This would potentially erode any value to Zakhele Futhi shareholders, increasing the chances of their investment being soured. MTN said the MTN shares owned by Zakhele Futhi might even be liquidated to free up cash to pay debt and other costs associated with the scheme, including tax obligations.

This would render the  Zakhele Futhi scheme a flop — like earlier schemes launched historically by JSE-listed conglomerates.

In recent years, companies such as Media24, Barloworld, African Bank, and others have failed to deliver attractive returns to black investors because the success of their B-BBBEE schemes, financed by large debt, depended on a rise in share prices and volatile commodities.

But MTN was once an exception. MTN launched Zakhele Futhi to replace an earlier and highly successful B-BBEE scheme called MTN Zakhele after it expired in 2016.

Black shareholders bought MTN Zakhele shares at R20 a share when the scheme launched in 2010. The share price more than doubled to R51.70 by the time MTN Zakhele expired — implying a compounded annual growth of about 20% per annum.  DM

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