MTN still on the hunt?

JSE-listed MTN, Africa's largest cellular operator, has not completely abandoned the idea of doing another big deal in the near future.

The company told shareholders during its recent annual general meeting that it was cooling off on trying to find expansion opportunities, as there were very few deals available that would add substantial value. Instead, the company said, it would return cash to shareholders.

However, this morning CEO Phuthuma Nhleko said the company was still open to the idea of acquiring companies as a way of expanding, as MTN is generating strong cash flows. Nhleko was speaking during the company's results presentation for the first six months of the year to June.

Nhleko says there could be regional consolidation opportunities from which the company can benefit. He adds that MTN is aware that the telecoms landscape is continuously changing, and it cannot ignore the possibility of doing more deals. Its gearing is also very low, which will allow it to acquire debt to finance a deal.

Africa's cellular market is characterised by many smaller operators and a handful of large companies. Analysts have been expecting to see consolidation for some time, and Nhleko says it has become a characteristic of the continent in the past nine months.

However, “opportunities that we regard as value accretive are few and far apart”, says Nhleko. Most of MTN's recent growth had come from organic growth and the company has several failed bids under its belt.

Two years ago, MTN entered the first round of talks with Bharti Airtel before scrapping the discussions after failing to agree on a shareholding structure. After reviving the proposed marriage, talks were abandoned after government interference led to the derailment of the R184 billion deal.

During the Bharti talks, MTN began discussions with India-based Reliance Communications Group regarding a “potential business combination”, but nothing came of it. More recently, a R24 billion merger opportunity with Egyptian telecoms operator Orascom failed.

MTN reported revenue 2.2% down, to R56 billion, during the half-year, while earnings before interest, tax, depreciation and amortisation declined 1.1%, to R24.2 billion. However, a continued focus on costs aided the company in growing adjusted headline earnings per share 20.6%, to 438.6c.

Revenue growth declined due to the effects of the stronger rand, which all but negated gains made in local currency in its operating countries. However, a good performance in SA and Iran aided margin gain, which improved to 43.3% from 42.8% at the earnings before interest, tax, depreciation and amortisation level.

Despite the slowing revenue, the company declared its maiden interim dividend of 151c a share, which was made possible by a 164% jump in free cash flow, to R6.8 billion. Nhleko says an interim dividend will be the company's policy going forward.

He also explained that the group would be balancing payouts to shareholders with its requirement to have cash on hand in case an acquisition opportunity arises. MTN has cash of R29 billion in the bank, according to its 30 June balance sheet.

Group FD Nazir Patel says the company currently has a low gearing level, which means it can acquire more finance without putting much strain on the balance sheet. However, any gearing up would depend on the size of the opportunity, says Nhleko.

Frost & Sullivan ICT industry analyst Spiwe Chireka expects MTN's aggressive expansion over the past few years will continue to be a key element of the group's success. As its two main markets - Nigeria and SA - increasingly come under pressure, operations in other parts of the world will become more important, she says.

“In addition, MTN is sitting on truckloads of money, so any acquisitions for expanding MTN Business will not be a problem,” she says. “In the medium term, we expect MTN to start giving traditional ICT providers a run for their money.”

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