How MTN, an African success story, faltered

May 26, 2016

How MTN, an African success story, faltered

 

Johannesburg – Phuthuma Nhleko spent more than a decade building MTN Group into Africa’s biggest wireless operator by rushing into markets few rivals would touch, from Syria to Afghanistan to South Sudan. Now his appetite for risk has come back to haunt him, and shareholders are calling for new leadership with a different approach.

The drawbacks of the aggressive style became apparent in October, when Nigeria slapped the company with a $5.2 billion fine – an unheard of amount equal to double the cash on MTN’s books. Chairman Nhleko, who had stepped aside as chief executive officer, returned to sort out the mess and line up a new CEO, giving himself six months.

With that deadline past and no signs of progress, investors will be looking for answers at the company’s annual meeting on Wednesday. Nigeria said last week negotiations on the now-$3.9 billion fine are on hold. The stock has lost almost one-third of its value, and short-seller Jim Chanos says the next move is down.

The missteps have rattled investors like Nick Crail, a money manager at Ashburton Investments. He’s concluded that MTN needs to bring in an outsider to run the company and make changes to the board to tame its freewheeling corporate culture. By doing so, Nhleko could show that MTN has a game plan that it can execute – essentially, that it is growing up.

“There is a perceived lack in the credibility of the MTN management team at the moment, and someone massively different, with a background in telecoms and a good execution track record, would be welcomed,” said Crail.

MTN didn’t immediately make Nhleko available for comment.

The Nigerian regulator fined MTN for moving too slowly to disconnect customers unregistered in the country, which is battling an Islamist insurgency. MTN engaged former US Attorney General Eric Holder, a partner at law firm Covington & Burling, to challenge the penalty.

A resolution may still be far off. Nigeria has suspended talks on the fine while the country’s House of Representatives completes an investigation into the size of the penalty and how it was delivered, a spokesman for the Ministry of Communications said Friday. MTN spokesman Chris Maroleng, in a statement Monday, said the company “cautions shareholders not to make any decisions based on media reports.”

Failing to heed the regulator “smacks of a cavalier attitude,” said Simon Brown, a trader at South African investment adviser JustOneLap. “They’re now paying the price.”

Cameroon, Syria

Problems sprouted up elsewhere as well. Cameroon’s regulator identified the company in January as one of three wireless operators that evaded taxes, which MTN denies. In Uganda, it was also ordered to disconnect subscribers. MTN South Sudan said last month it would cut more than half its workforce and cancel expansion plans in the war-torn nation.

“It’s clear that MTN did not do a good job in the past in controlling risk,” said Erhan Gurses, a telecommunications analyst for Bloomberg Intelligence. “The company will definitely need to be stricter in terms of corporate governance.”

The share slide erased about R118 billion ($7.5 billion) from MTN’s market capitalisation since October, putting the company behind Vodacom Group as Africa’s most valuable phone operator.

Some investors see more trouble ahead. Chanos, the founder and managing partner of Kynikos Associates, said this month he’s betting MTN will fall further as weak commodity prices curb demand in some of its biggest markets. Those include oil-rich Nigeria and South Africa, where the central bank on Thursday cut its growth forecast for the year to 0.6 percent.

Ohio State

Nhleko, 56, an Ohio State-educated engineering graduate, transformed MTN from a small South African wireless carrier into a regional giant with operations in 22 countries across Africa and the Middle East. He also became one of the wealthiest black South Africans, with assets of $142 million, the Johannesburg-based Sunday Times newspaper reported last June. MTN is the industry leader in 15 nations, including Nigeria, its biggest market with about 61 million of its 229 million customers.

Nhleko, who served almost nine years as chief executive before stepping down in 2011, returned to the helm as executive chairman after CEO Sifiso Dabengwa quit in the wake of the fine.

Among potential contenders for the top job, Marco Patuano, who resigned as head of Telecom Italia in March, said he is “not a candidate” for the CEO post at MTN.

With investors pushing for an outsider, the chances may have dimmed for internal candidates such as South Africa head Mteto Nyati or Nigeria CEO Ferdi Moolman.

‘Different prism’

Nhleko has already reorganised to improve compliance, separating the company into three clearly defined regions with vice presidents all reporting directly to the CEO. He also created the position of chief operating officer and named Matthew Odgers, a former investment-banking executive at UBS Group, as head of mergers and acquisitions.

“MTN was a lot more willing to consider risky ventures than other large mobile network operators,” said Dobek Pater, managing director of Pretoria-based Africa Analysis. “It now requires a top management that will ensure the company’s stability and assess new opportunities through a somewhat different prism.”

 

By Loni Prinsloo and John Bowker.

-With assistance from Daniele Lepido.