If MTN’s being treated like an ATM, should it close the bank?


If MTN’s being treated like an ATM, should it close the bank?

Nigerian politicians levied fines based on delusional nonsense news about how profitable the operations are

Tim Cohen

The Nigerian government treats MTN like an ATM, so should MTN just close “the bank”, hand back its licence and leave? It’s a tempting thought, but it is more complicated than that.
The consequences of the Nigerian government’s decision to slap new fines on MTN is devastating for the company: $8.1bn for allegedly shipping more dividends out of Nigeria than allowed, and a further $2bn in notionally unpaid taxes. This comes on top of the $5bn claim for failing to cancel dormant accounts, which was eventually settled for about $1bn.
It’s all very political, but what effect will this have on MTN’s Nigerian operation? The short answer is huge. MTN Nigeria reported an after-tax profit of Nira32bn for 2018, which is about $90m. The combination of the fines will, therefore, cancel out profits for the next 88 years if they are imposed. If that’s the case, what is the point of operating in Nigeria?
And where do the Nigerian politicians get these bizarre numbers? Partly from quasi-delusional nonsense news about how profitable the Nigerian operations are – notions  which are totally at odds with the company’s own freely available public announcements which specify very precisely all the main details of its Nigerian operation.
Do a Google search on MTN’s profits in Nigeria, and the top story goes all the way back to 2011. Its headline says MTN’s Nigerian profits that year were Nira473bn, worth today about $1.3bn. (Actually, that was the turnover figure for MTN’s West African operations for that year). The fourth from the top story is that MTN has made $28bn over the past decade – based on contributions it has made to the National Information Technology Development Agency (MTN is obliged to pay 1% of its profits to the agency).
This figure too is an absurdity. The company declared a net profit after tax of R3.3bn in the 12 months to June 2018. That’s rands. And that from the whole bang shoot: all 21 countries in which it operates. Even if you add back the R2.5bn fine it paid the Nigerians last year, that is still only a profit of R5.8bn.
It’s true that these profits have come down massively; as recently as 2015, it earned R32bn from all its operations. But then in 2016 and 2017, it paid fines of R10bn and R9bn respectively. Essentially, the company is paying out its entire profits from its Nigerian operations, and more, in fines to the Nigerian government.
The oddity of MTN’s operation in Nigeria is that while it’s become the faux ATM of the government, it’s incredibly popular among ordinary Nigerians. For years, MTN vied with Glo Mobile and Airtel (formerly Zain) for dominance in Nigeria. But now the company is by miles the most popular provider in Nigeria, with double the market share of each of its main competitors. Is it possible that the very popularity of MTN in Nigeria is part of the problem?
The other issue for MTN is how important the Nigerian business is for the business as a whole. It constitutes about 55 million of its 223 million total subscribers. And at an earnings level, the operation is respectably profitable, more or less in line with its South African operation. Nigeria generates about a third of its total earnings.
The numbers are so bizarre, already investors seem to be assuming that the numbers thrown out by the Nigerian government are simply the start of negotiating process in which you demand, say, five times more than you think you are going to get. The share price of MTN came down 17% after the announcement, which took about $2bn off the market cap – roughly a fifth of its pre-announcement market cap.
How certain is the claim? On the face of it not very, or at least much less certain than the previous fine for not closing dormant accounts. The regulator’s claim is that MTN’s Nigerian unit improperly issued preference shares to the Johannesburg-based company, and is therefore obliged to repay the dividends it distributed over the past decade.
The problem is that the shares were issued in lieu of an inter-company loan. We don’t know how big the loan was, but it can hardly make a huge difference if the company repaid the loan in cash or dividends. Whatever the case, on the face of it, this is not an illegitimate business deal. If it was an illegitimate deal, the Nigerian regulators had a decade in which to inform the company, and by not doing so for so long, it could be argued it implicitly endorsed the strategy. That would hardly have been an abstruse thing to do since it was a pretty straightforward business deal.
The result of the fines will be that the promised listing on the Nigerian exchange is most probably off for the time being, as are the plans to increase the dividend. The degree to which MTN’s problems in Nigeria and elsewhere are weighing on the company are really eye-popping if you compare the company to its main competitors. MTN has a market cap now of $8.5bn, roughly the same as its annual revenue. Compare that to Safaricom, which has a market cap of $11bn off a revenue of $3.2bn, or Vodacom which has a market cap of $13.5bn off a revenue of $5.6bn.
Off these numbers, you would have to say the MTN is a thumping buy. But with the constant drip-drip of bad news, it seems that investors have hung up. This is a terrible pity for a company that prides itself in boldly going where few have gone before, and which provides a vital service that palpably does so much good.

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