Impact of MTN’s results on Zakhele shareholders

2012-03-17 08:03

MTN released its annual results for the financial year to December 31 2011 on March 7 2012.

MTN surprised the market somewhat with good earnings, about R10.70 a share, and a ­­higher- than-expected final dividend of R4.76 a share.

This final dividend brings the total dividends paid by the company over the financial year to a stunning R7.49 dividend out of R10.70 earnings, a high payout ratio.

The market initially approved, but the share ended the day marginally lower at R139 a share. However, the higher-than-expected dividend is good news for MTN Zakhele shareholders.

MTN Zakhele invited members of the public to become shareholders in October 2010. The MTN Zakhele shares were valued at R42 at the time, but were sold to the public at a price of R20 a share.

The public were invited to apply for 80.9 million MTN Zakhele shares.

It took these funds – R2.1 billion worth of debt and R3.2 billion worth of vendor funding – and bought 75.3 million MTN ordinary shares (4% of the company) at a price of R107.44 a share. This price represented a discount value of R1.29 billion.

The debt funding was raised by issuing preference shares. The A prefs (R1.4 billion worth) were issued at a fixed cost until April 2013, after which interest would be charged at 77% of prime. The B prefs (R720 million worth) were issued at a floating rate of 88% of prime.

MTN Zakhele would then use the dividend proceeds from this holding of MTN shares to service the debt.

At the end of the empowerment period – sometime in 2016 – MTN Zakhele will sell as many MTN shares as needed to settle the remaining debt, and MTN Zakhele shareholders will receive MTN shares for MTN Zakhele shares in a ratio determined at that stage.

Given the figures above, it is estimated that MTN Zakhele earned R560 million in dividends in 2011.

This would be used to service the R2.1 billion debt burden and to buy additional MTN shares in the market with any excess cash.

We estimate debt servicing costs to be between R120 million and R150 million, meaning that there would be a substantial amount of money left for MTN Zakhele to purchase MTN shares. This has the effect of increasing the number of MTN shares in MTN Zakhele, and potentially future dividends, which is good for MTN Zakhele shareholders.

Using the formula from the MTN Zakhele prospectus, we get a valuation for MTZ of around R63 a share, which implies a return of 215% since inception.

However, MTN Zakhele shares are not tradeable yet, so investors will not be able to access this value.

Investors will be able to trade towards the end of 2013, but only trade between qualifying black investors will be allowed.

This is expected to introduce liquidity constraints, meaning that investors will be unlikely to access full value at that point either.

For investors who are prepared to hold on to their shares, at the end of 2016 MTN Zakhele shareholders will receive MTN shares in a certain ratio determined at that point, which can then be traded on the stock market with any investors.

This will address the liquidity constraint – and allow investors to receive full value for their investment.

» Craig Gradidge is a co-founder of Gradidge-Mahura Investments, a new-generation financial planning company based in Melrose Arch. Gradidge owns shares in MTN Zakhele
»  Next week, Gradidge looks at the impact of Sasol’s results on its BEE shareholders

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