MTN, Africa's largest cellular operator, last year replaced its previous empowerment structure, Newshelf, with Zakhele. The company offered 4% of its ordinary shares to members of the black public at R20 per share, which equates to an effective 29% stake in MTN SA.
The offer was more than 1.7 times subscribed, as more than 124 000 applicants across the country applied for Zakhele shares, which raised about R1.6 billion to partially fund the purchase of MTN shares.
Zakhele also received a R1.3 billion donation and vendor financing of R3.2 billion from MTN. Third-party funding amounted to R2.16 billion.
Speaking during the entity's first annual general meeting yesterday, chairman Thulani Gcabashe said the structure was “financially strong” despite current market volatility.Thanks to better than expected dividends from MTN, Zakhele has been able to repay about R240 million of capital on loans, “which was not obviously anticipated,” says Gcabashe.
According to Zakhele's annual report, released yesterday, the entity received income of R1.3 billion in the year to December. Of this, R50.8 million was in dividends and R1.3 billion in donations from the MTN group.
Zakhele also earned interest worth R21.4 million, paid interest of R24.4 million and paid R220.3 million in tax. It ended the year with a net profit of R2.6 billion and ended the year with R72 million in cash.
Gcabashe, writing in the annual report, says Zakhele's success depends on MTN's share price and the ongoing payment of dividends from the cellular company, which makes it possible for Zakhele to “service its funding commitments”.
MTN announced two dividends during the 2010 year, with interim dividends being paid for the first time. Gcabashe says the dividend income will be first used to pay expenses and then meet its obligations to third-party funders.
Gcabashe says although the strong rand will continue to weigh on MTN's earnings, as 75% of its income comes from outside SA, he is confident of the company's prospects for 2011.
“The robust funding structure of MTN Zakhele, strong cash flow from expected increasing MTN dividends and a healthy MTN performance to date give me great confidence in the prospects of the company for 2011,” says Gcabashe.
He does not expect interest rates to increase before early next year, which will result in the cost of funding remaining at about the same level.
MTN Zakhele has 121 151 broad-based black economic empowerment shareholders, who indirectly own a part of the listed group.
The deal, the largest in the telecoms sector so far, resulted in MTN's BEE rating improving from level three to level two this year, the second highest possible rating. Shareholders are locked in for three years, and can only sell their stakes to other black investors after year three. After the sixth year, there are no restrictions on selling stock.
The MTN Zakhele structure is expected to run for a six-year period, although investors can sell their shares after year three, but only to other black investors.
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