MTN: Battle for the throne

Former MTN Group CEO Phuthuma Nhleko returned to the firm recently as chairman. While he has been praised for MTN’s impressive growth during his tenure, his appointment has raised corporate governance questions. Thabiso Mochiko of Financial Mail, explores what this means

In almost a decade that Phuthuma Nhleko ran MTN Group, the cellphone company emerged from being part of a huge pack of single-country operators to an emerging markets telecoms giant.

It has become the largest operator in Africa and the Middle East, with services in 22 countries. The company is now the largest locally based stock on the JSE and the world’s eighth-largest cellphone operator by market capitalisation. It is 20% larger than Anglo American.

Then Nhleko left, only to return in June this year. The return of the man known as a media-shy executive but aggressive deal-maker who grew MTN into what is now a R350bn company has raised eyebrows. This is largely because he returns to a company that, despite its successes, now sits at something of an existential crossroads.

Nhleko returns as non executive chairman rather than CEO and is deferential about his role as background guide and mentor. He is also at pains to underline the foreground, policy-making function of former colleague Sifiso Dabengwa, who replaced him as MTN Group CEO.

“There are two misconceptions here. Coming back as a nonexecutive chairman, I have no operational responsibilities. I will not have responsibilities for strategy. Both those are firmly the prerogative management,” Nhleko said in a rare interview.

“I will be supportive and engage in robust debate where necessary but this is really a management-driven platform.” The second misconception is that MTN’s growth was primarily a result of acquisitions. “There was a considerable amount of organic growth precipitated by good operational and management structures,” he says.

This may be true but it’s hard not to notice the differences in style of the two executives. The dissimilarity is partly explained by the context in which each has operated: Nhleko inherited a nascent operation in a formative stage of the industry; Dabengwa took over a company approaching early maturity.

Yet there is a nagging concern over the efficacy of the new arrangement in which, effectively, a powerful and widely respected former CEO returns to a company faced with multiple challenges.

Under Nhleko, MTN’s expansion was impressive, based on the unfashionable view at the time that the African market was an attractive growth prospect. In retrospect, it appears visionary.

Since Nhleko resigned as CEO in 2011, Dabengwa has made small acquisitions but has had to deal with an array of difficult operational issues. These have ranged from the functional, such as increasing competition in SA, to the absurd, like the lawsuit filed by Turkish operator Turkcell, which verged on extortion.

More recently, MTN has been in the press concerning issues of governance. Earlier this month, chief financial officer Nazir Patel resigned for reasons the company has chosen not to explain, but which are understood to concern diverting money locked inside Iran since the imposition of financial sanctions by the US on Tehran.

This week, MTN found itself embroiled in former communications minister Dina Pule’s information & communications technology (ICT) indaba scandal with the suspension of chief corporate services officer for MTN SA, Robert Madzonga.

These are merely the latest issues for which it has made the news. If you judge by the press coverage it has received over the past few years, the company seems assailed from all directions. Nhleko says the level of press attention was unfair. “My honest impression is that there is a disproportionate media spotlight on MTN. Having said that, MTN is a large company, and some of that comes with the territory.”

It’s a contradictory time for the company; it is highly rated and sitting on a p:e of just over 16. Its share price appears unaffected by the media spotlight on its problems.

Its stock is trading at close to record levels, almost touching R200 over the past week. The average annual share price growth during Nhleko’s term was explosive, but the increase during Dabengwa’s shorter term is not to be sneezed at.

The company churns out money, with net profit of about R20bn for the full year on an operating margin of just below 30%. It has a healthy debt:equity ratio of 17% and this is without stinting on paying a heavy tax bill.

But beneath this formidable structure cracks are beginning to show. Since competitor Vodacom listed in SA 4½ years ago, its share price has grown a whopping 115%, while MTN’s is up by a comparatively smaller 45%, in line with other big international players.

Behind this share price differential is a changing market. Cellphone companies experienced the first wave of growth with the establishment of the initial telephone service. Then followed a second wave underpinned by data services.

Vodacom was probably in a slightly better position to take advantage of this wave, but MTN has proved no slouch. MTN has acknowledged that it slipped up by responding too slowly to a price war initiated by Cell C more than a year ago. As a result, MTN recorded a net loss in customers in SA in the year ending June 2013 – a rare event. This battle is still being fought, and MTN has somewhat made up for lost ground. But the slip underlines the need for the company, and perhaps all companies in the sector, to look to their laurels.

There is a challenge from another direction, too. There exists a third wave of potential income, from services, which includes the provision of a range of options, from banking to music distribution. Like many other cellphone companies, MTN is already far down this road. Its mobile banking operations in Uganda match the much-heralded services offered by Safaricom next door in Kenya. In Nigeria, MTN is already one of the largest distributors of digital music. This is something of a paradigm shift, requiring a new skills set that is more orientated towards software than hardware.

Though Nhleko was appointed because former chairman Cyril Ramaphosa vacated the position after he was elected ANC deputy president, is it really unlikely that the board felt the need for an additional, trusted hand on the tiller?

If so, the company remains coy, as always. Alan van Biljon, MTN’s lead independent director, says the board followed an extensive process in its search and that two internal and five external candidates were in the running for the position. He says the matter of independence was considered by the selection panel and board. Nhleko left MTN two years ago, which is less than the “cooling off” period specified by the King code on corporate governance. “The difference in time did not seem significant,” he says.

“It was thought by the panel and the board that Phuthuma’s considerable skills, together with his knowledge of the industry and the company, made him an exceptionally strong candidate for the position of chairman. To exclude him from consideration for the sake of a few months in the qualification period would not, in the opinion of the panel, have served the board or the shareholders well,” says Van Biljon.

Nhleko’s return was supported by all shareholders, including the M1 Group and Public Investment Corp (PIC). The PIC says it was given only Nhleko’s name by the MTN board and after taking into consideration his vast knowledge of the sector and the company, it supported his appointment.

Azmi Mikati, CEO of M1 Group, says it was not predetermined that Nhleko would return as chairman. “I have obviously worked with Phuthuma when he was CEO of MTN and have a very high regard for his abilities … the decision on the chairmanship was taken by the board as a whole.”

MTN has eight independent non executive directors. The MTN board says it believes Nhleko’s previous running of MTN and his experience in the telecoms industry will benefit the company. The question is whether having a former CEO as chairman could lead to tension with the executive team, particularly the CEO.

Dabengwa says he does not expect radical change under Nhleko’s chairmanship. “He will make his contribution as a non executive director and I don’t see any particular reason why there will be changes,” he says.

Dabengwa was MTN Group chief operating officer (COO) for several years before being promoted to CEO. Some observers, however, sense a clash of the different leadership and management styles.

Khulekani Dlamini, head of research at Afena Capital, describes Dabengwa as more of a “technical CEO” since he had been COO. “The focus has therefore moved more towards improving efficiencies across the board to mitigate against the effect of increased competition and tightening regulation. We have seen less acquisitive flair.”

Farai Mapfinya, research analyst and portfolio manager at Mvunonala Asset Managers, says not much has changed in the past two years. “We haven’t seen any material change in strategy and leadership style. Sifiso Dabengwa comes across as a very strong operations man, given his background in the business, and less of the deal-maker that characterised Phuthuma Nhleko’s tenure.”

Dabengwa has consolidated what has already been acquired and pursued new deals, in Burma for instance, where it failed to acquire a licence . In the past year, MTN secured a value-added licence in Ethiopia where it provides multimedia services such as ringtones. With a war chest of about $8bn, it is expected to continue prowling for acquisitions to expand into Southeast Asia, such as into Indonesia, since the African market is close to saturation.

Dabengwa says if an opportunity arises, the group will pursue it. Though Nhleko’s exceptional track record trumps criticism about his appointment as chairman, investors should probably not expect the levels of growth seen during his tenure.

Mapfinya does not expect MTN to pursue deals as aggressively as it did under Nhleko. “The market is quite different from what it was back then. Opportunities are few and far between and the premium one pays for buying mature and established businesses is quite high. Consequently, aggressive deal-making may not necessarily create value or be in shareholders’ interests,” she says.

Nyanga agrees, adding that times have changed. Under Nhleko’s leadership MTN was in a growth phase and was expected to be aggressive. “But now we consider MTN as a mature company and growth has to be controlled.” But Dlamini believes there are markets on the continent where MTN could still get exposure, especially in those areas where global players have no presence or a marginal one. “I would argue that they could get involved but those would be marginal unless they buy out companies like Orange, Millicom or Orascom,” he says.

Spectrum bandwidth is becoming increasingly important for an operator’s growth and Dlamini believes MTN should pursue acquisitions such as iBurst in SA or a player with CDMA technology in Nigeria. “Social networking and related e-commerce ecosystems drive traffic and continue to create value on top of the network [therefore] strategic acquisitions could make sense.”

MTN has been in talks to buy Neotel, SA’s second fixed line operator. Dabengwa says MTN was more interested in accessing Neotel’s spectrum but the talks fell through. Spectrum is one of the scarce resources that operators need to provide faster wireless networks such as long-term evolution (LTE) or 4G.

Dabengwa agrees that greenfields opportunities are fading. He says though consolidation is inevitable, MTN will do acquisitions only if it believes it can create value out of them. “In our business, creating value after paying a premium will be difficult, especially if penetration is high already.

“In most countries penetration is already over 50% and the opportunity to create value is probably not as high as it was five years ago, when the penetration levels were low. Even if you paid a premium then, you had huge growth opportunity.”

MTN’s contribution and symbolical significance to the SA economy is immense: it is the prime example of how a company based in SA, in a technology industry, can become a global giant.

The complex network of factors required for that to happen included tangibles such as the growth of a new industry and operational aptitude. But it also included intangibles such as a strategic vision and confidence in the future. Those qualities will be as necessary during MTN’s third wave of innovation, as they were in the first two, and it may be those qualities that prompted the MTN board to approve the return of the pilot.