By Ryk de Klerk
JOHANNESBURG - Holders of MTNZF shares have reason to be worried about the value of their holdings.
They acquired 51.1million MTN shares at a price of about R90 per MTN share and partly financed by cash and the issue of preference shares to third parties. MTN, however, had a call option to acquire the outstanding preference shares.
The impacts of the coronavirus led to certain covenants triggered and had MTN exercising the call option on the preference shares that are mandatory redeemable to the holders by no later than November 23, 2021.
After taking into account MTNZF’s receipt of the payment of MTN’s final dividend for the year and the use thereof to service the preference shares, I estimate that the outstanding preference shares could amount to close to R1billion.
The second leg of MTNZF’s holding in MTN is 25.7million shares financed through notional vendor finance (NVF). MTN Group has a call option expected to expire in 2024 against MTNZF in respect of the shares included in the NVF facility.
The option is valued in line with standard market practice where the market share price of MTN Group shares is one of the major inputs.
The value of the option at the end of 2019 was a liability to MTNZF of R1bn.
With the collapse of MTN’s share price to R58 from R82 at year end, I estimate that the option liability probably increased to as high as R1.4bn.
The value of MTNZF’s direct investment in MTN through the 51.1million shares fell to about R3bn from R4.2bn at the end of 2019.
The net assets of MTNZF could, therefore, amount to around R600million, calculated as follows: R3bn (assets) minus R1.4bn (option liability) minus R1bn (preference share liability).
That compares to MTNZF’s market capitalisation of R1.3bn. That is even before taking into account the servicing of MTNZF’s preference shares that accrue preference share dividends at a rate of 75 percent of the South African prime rate that could amount to R53m for the six months to end September.
MTNZF is in a precarious financial position, specifically MTN’s announcement that it will pass its interim dividend. The company will not have sufficient cash to survive.
Even if MTN provides interim relief by foregoing or furloughing the interim preference share dividend, a weak MTN Group share price and the weak outlook for dividends will impact harshly on MTNZF’s option liability.
In MTN’s recent trading update a possible final dividend of 390cents for this year was indicated, but it may be too little too late.
MTNZF will be forced to sell a big chunk of its holdings in MTN as it will not be in a position to redeem all or even half of the outstanding redeemable preference shares held by MTN by November next year through dividends received from MTN.
For MTNZF to survive, deep sacrifices will have to be made. More capital will need to be raised or other corporate actions taken.
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Ryk de Klerk is analyst-at-large. Contact [email protected]. The views expressed above are his own. You should consult at broker or investment adviser for advice.
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