MTN released its annual results for the financial year end December 31 2011 on March 7 2012. They surprised the market somewhat with good earnings, around R10.70 a share, and a higher than expected final dividend of R4.76 a share. The market initially approved, but the share ended the day marginally lower at R139 a share. The higher than expected dividend meant that the company delivered a stunning R7.49 dividend out of R10.70 earnings, a high payout ratio.
The question that immediately came to my mind was what does this mean for MTN Zakhele shareholders? Just to recap:
MTN Zakhele (MTZ) invited formerly disadvantaged members of the public to become shareholders in October 2010. The MTZ shares were value at around R42 at the time, but were sold to the public at a price of R20 a share. The public were invited to apply for 80.9m MTZ shares. It took these funds, R2.1bn worth of debt and R3.2bn worth of vendor funding and bought 75.3 MTN ordinary shares (4% of the company) at a price of R107.44 a share. This price represented a discount value at a total of R1.29bn.
The debt funding was raised by issuing preference shares. The A prefs (R1.4bn worth)were issued at a fixed cost until April 2013 after which interest would be charged at 77% of prime. The B prefs (R720m worth) were issued at a floating rate of 88% of prime.
MTZ 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 – MTZ will sell as many MTN shares as needed to settle the remaining debt, and MTZ shareholders will then receive MTN shares for MTZ shares in a ratio determined at that stage.
Given the figures above it is estimated that MTZ earned about R560m in dividends in total for 2011. This would be used to service the R2.1bn debt burden, and to buy additional MTN shares in the market with any excess cash. We estimate debt servicing costs to be between R120m to R150m meaning that there would be a substantial amount of money left for MTZ to purchase MTN shares. This has the effect of increasing the number of MTN shares in MTZ, and potentially future dividends, which is good for MTZ shareholders.
Using the formula from the MTZ prospectus we get a valuation for MTZ of around R63 a share, which implies a return of 215% since inception. However, MTZ shares are not tradable 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. At the end of the 2016 though MTZ 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