MTN Zakhele Futhi: too soon to judge!

This post first appeared on The Gradidge Patch.

The long awaited announcement of the new MTN BBBEE deal happened this past Monday 22 August. MTN and MTN Zakhele (MTNZ) both announced that MTN Zakhele Futhi (MTNZF) would replace MTNZ deal post the unwinding of MTNZ in November 2016. The black public is invited to apply for shares in MTNZF and MTNZ shareholders have an option to convert all or a portion of the MTNZ shares to MTNZF shares.

There seemed to be a lot of excitement in the market following the announcement, which is surprising as the prospectus will only be available early September. I have read articles complaining about the 8 year term attached to MTNZF, while others have complained about the 20% discount, and others have complained about both. I do not believe that there is sufficient information available at this stage to make a judgement call on the deal before the prospectus is released.

However, there is some useful information available from the announcement and this is what we know at this stage;

The offer will open on or around 12 September and will close on or around 21 October
The empowerment period is 8 years, with no trade possible in the first 3 years. Restricted trade between qualifying black investors will be possible in the last 5 years
The deal is being structured similarly to the MTNZ deal in terms of funding (discussed in more detail below)
The deal will not happen if less than R1.24bn is raised between the black public and MTNZ shareholders opting for the Re-investment offer
The MTNZF deal is similar to the MTNZ deal in many ways especially with regard to transaction funding. The funding structure is summarised below and compared to the MTNZ deal in 2010:

Screen Shot 2016-08-24 at 2.25.47 PM

The key difference between the deals is that MTNZF has an 8 year maturity compared to MTNZ at 6 years. I do not believe that the extra two years is significant, in fact it could add meaningfully to MTNZF shareholders as it could result in more debt being settled and a higher conversion ratio of MTNZF to MTN shares at the end of the period. Imagine if MTNZ had another 2 years to go, it is possible that all of the debt in MTNZ would have been settled and investors would have ended very close to a 1:1 conversion of MTNZ to MTN if the dividends from MTN remained largely the same as the past two years.

It will be interesting to see how MTNZF deals with the issue of dividend payments to MTNZF shareholders during the 8 years. My hope is that the prospectus gives directors some discretion on this important issue. Many MTNZ shareholders complained about the lack of dividends from MTNZ.

Given the similarities between MTNZF and MTNZ in capital structure, perhaps there will be similarities in the returns achieved by both deals. We need to wait and see the details around the cost of the debt, the debt covenants, etc. but I expect that they will be largely similar to those of MTNZ, in which case MTNZF could possibly end up being more lucrative for investors patient enough to participate in the deal until maturity.

MTN is arguably in a tougher spot today than it was in 2010 when the MTNZ deal came to market. This may in fact work in MTNZF shareholders favour as they are buying in with the prospect of a recovery in the coming years. MTNZF is buying MTN shares at R102 versus the R107 MTNZ paid, but they are also putting up more equity this time, but MTN is offering a bigger discount this time too. All in all it is pointless comparing the relative prospects; MTNZF looks a compelling offer at this stage.

Important: MTNZ shareholders have to make a decision regarding the Re-investment Offer by 19 October. They can either default to a cash payment, choose to receive MTNZF shares to the value of the MTNZ shares (a minimum of 50 MTNZ shares needed for this option), or opt for ordinary MTN shares (a minimum of 200 MTNZ shares needed for this option). If they have enough shares they could opt for a combination of the above options. MTNZ shareholders that do not make an option will receive the default option of a cash payment provided that their bank details are up to date.

I hope my kids will like their Christmas present this year. They will both be getting MTNZF shares. My daughter will be a teenager when the scheme matures so at least we both have something to look forward to now!

(A shortened version of this article is expected to appear in the City Press on Sunday 28 August 2016)

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