Black investors are riled by ‘long road’ to true empowerment in MTN Zakhele Futhi scheme
Investors were alarmed when Zakhele Futhi commanded an opening price of R1.10 on the first day of its trade on the JSE. This valuation was 95% lower than the R20 investors shelled out in 2016 for each share when MTN’s Black Economic Empowerment scheme was launched.
The JSE listing of MTN’s Black Economic Empowerment (BEE) share scheme on Monday 25 November 2019 was meant to pave the way for 89,000 black investors to freely trade shares with their counterparts after a three-year ban.
Instead, this milestone is overshadowed by the ire of investors over the freefall in the value of their shares in a BEE scheme called MTN Zakhele Futhi.
When telecommunications giant MTN launched Zakhele Futhi on 26 November 2016, black would-be investors were invited to pay R20 for each Zakhele Futhi share, with a minimum investment of R2,000.
The drawcard of Zakhele Futhi, which will run for the next five years and then end, was that it would give investors exposure to MTN Group and its profits from SA and the rest of Africa telecommunications operations. This was because Zakhele Futhi has a 4% shareholding in MTN Group (equivalent to 76,835,378 issued shares), which is the BEE share scheme’s only underlying asset.
Zakhele Futhi was offered MTN shares at a 20% discount (issued at R102.80 instead of the R128.50 trading price on 17 August 2016), sweetening the BEE share scheme’s proposition.
Qualifying investors that bought shares were locked into the scheme for three years, without being able to sell or trade their shares. Once the three-year period ended, Zakhele Futhi listed on the JSE, allowing black investors to only buy and sell shares among one another.
This was accomplished, with Zakhele Futhi commanding an opening price of R1.10 on the JSE — 95% lower than the R20 investors shelled out in 2016 for each share.
Investors are vexed, with one telling Business Maverick:
“What was the point of buying shares in the first place if they don’t have much value. There will be a long road to empowerment.”
The rise in the value of shares
At the end of the JSE’s trading session on Tuesday 26 November 2019, Zakhele Futhi shares rose to R16 a share. However, the shares are still below Zakhele Futhi’s net asset value (its assets — MTN shares) minus its debt) of R22 as of October 2019.
Zakhele Futhi’s purchase of a 4% stake in MTN, worth about R7-billion, was funded through debt — mainly notional vendor financing (money lent by a company to prospective investors) of R3-billion from MTN and commercial banks injected R2.4-billion.
Zakhele Futhi’s debt is more than R5-billion, which it currently pays through dividends it receives from MTN. This debt has to be repaid when Zakhele Futhi ends in 2024.
The main reason for the slump in Zakhele Futhi shares is its low trading volumes on the JSE. In financial markets, the act of buying and selling of shares in an open market influences the price of shares; the price moves up if there’s more buying/demand and declines if there are few sellers.
Sindisiwe Mabaso-Koyana, the chairperson of Zakhele Futhi, said the initial low valuation of shares indicated “early trading days”.
She believes the valuation is also a reflection of a tough SA economy wherein Zakhele Futhi investors prefer to cash in their shares and receive a windfall rather than see the value of long-term investing.
“We believe that the market will push the value of shares to the net asset value. We believe the price will stabilise to a reasonable point,” she told Business Maverick.
Another complexity is that there are not many buyers and sellers of BEE shares due to how empowerment schemes are structured and restricted to a select group of investors, said BEE analyst Riaz Gardee.
The restriction in Zakhele Futhi’s case is that investors can sell shares to black investors, limiting the universe of would-be buyers. This is a rule set up by MTN because it wants to transform its shareholder base, and affirmed by JSE rules because Zakhele Futhi is listed on the bourse’s BEE segment.
Dangers of BEE schemes
The initial experiences of Zakhele Futhi investors have conjured up fears that the BEE scheme might flop and not create any value — like earlier schemes launched historically by JSE-listed conglomerates.
But MTN was once an exception. The company launched Zakhele Futhi to replace an earlier and highly successful BEE scheme called MTN Zakhele when it expired in 2016.
Black shareholders subscribed for MTN Zakhele shares at R20 a share when the scheme launched in 2010. The share price more than doubled to R51.70 by the time MTN Zakhele expired — implying a compounded annual growth of about 20% per annum.
In recent years, companies such as Media24, Barloworld, African Bank, and others have failed to deliver attractive returns to black investors because the success of their BEE schemes, which are financed by large debt, depended on a rise in share prices and volatile commodities.
It’s a similar case with Zakhele Futhi, whose fortunes are tied to the performance of MTN’s shares. For example, when Zakhele Futhi was launched on 26 November 2016, MTN’s share price was trading at R118.13.
The share price is R91.48 exactly three years later — meaning the BEE share scheme’s investment in the company has lost about R2-billion in three years.
The decline of MTN’s share price has also seen Zakhele Futhi’s net asset value being revised down (R32.61 in December 2016, R37.59 in December 2017, R32.61 in December 2018, R27.88 in June 2019, R22 in October 2019). BM