Nhleko’s calling
TWELVE years after selling its first cellphone in South Africa, MTN has become a major force in the telecommunications world.
This week the company announced its R33.5-billion takeover of Middle Eastern and African cellphone operator Investcom.
The deal sees MTN decrease its reliance on South Africa and start to recruit significantly from outside the country. But chief executive Phuthuma Nhleko said that while “we see things more as a multinational, SA will always be the DNA of the company”.
The massive growth in cellphone demand across the world has obviously helped MTN, and the industry, to grow quickly, but so too has its strategy of expanding into emerging markets and countries where other potential investors fear to tread.
The until now low-profile Nhleko, CEO since 2002, has made use of MTN’s competitive advantage — its ability to work in emerging markets and manage political risk — to develop MTN into a global operator.
Recent deals in Iran, and now with the Middle East and Africa-focused Investcom, have catapulted it into a major player on the international stage.
After the disappointment of losing the $2.7-billion bid for another African operator, Celtel, last year, Nhleko chose a more expensive and possibly more risky investment in Investcom to move him closer to achieving his aim of becoming the major cellphone player in Africa and the Middle East. And MTN is almost there. Egypt’s Orascom is the only bigger player, with 30 million subscribers against MTN’s post-deal 28 million.
It is Nhleko’s ability to cope well in new markets that has gained him respect in the investment community.
“He executes his vision in a prudent manner,” said Khulekani Dlamini, a director of Renaissance Asset Management.
“What has surprised the market is his doggedness in following his vision of being the biggest emerging-markets player. We have always been aware he was technically capable, but not always aware of his ability to execute on his belief.”
Dlamini said Nhleko’s strength was his ability to entertain the ideaof going into areas most people considered risky. And he has realised the secret to success is “social currency”, Dlamini said. This means that if you deliver to people the ability to communicate, you will be successful despite the risk, he added.
Despite fears that its two big acquisitions could stretch its management too thinly, late this week it emerged that MTN was also confirmed as one of 11 bidders for Egypt’s third cellphone licence. Bidding will start at $434-million.
Interestingly, a magazine profile on Nhleko indicates the other South African company he most admires is SABMiller. The two companies have followed similar strategies, although SABMiller’s is arguably less risky in that the developing markets it has targeted are China, South America and Eastern Europe, in addition to Africa.
Much has been said about the political risk of MTN’s investment in Iran, a country in the cross hairs of the US. But other countries now under its umbrella following the Investcom takeover could be equally risky. They include Afghanistan and Liberia — and Sudan — shunned by other investors because of human rights issues.
Nhleko defends the deal, saying MTN has bought a London and Dubai-listed public company that adheres to international standards.
“So it happens that part of that portfolio are countries that have challenges. By and large, we limit ourselves to business and leave politics to others.
“It becomes a very political debate. But MTN is also a new South African company and we believe in being a constructive and positive force.”
MTN has, more than most other South African companies, managed to grow while effecting significant black ownership and the transformation of top management.
It has also diversified geographically while retaining its South African flavour.
The recent deals will, however, test the skills of management. Nhleko has recognised the need for the organisation to scale up — and it has.
“We are dividing into regions which will have heads reporting to me and the chief operating officer, to make sure we get closer to and not further from these operations and not drop any balls in any countries.
“At the same time, we are not taking our eye off the ball in SA. SA is competitive and the South African team has challenging targets to meet.”
MTN has always played second fiddle to Vodacom locally, but it is fighting for market share by sponsoring sports and cultural events in the country. Although it remains committed to South Africa, commentators believe this is not where MTN sees significant future growth. The company has, over the years, developed a larger footprint in Africa than Vodacom.
Its biggest success has been in Nigeria, where it started up in 2001. The operation it built from scratch is now a cash cow for the group. MTN also has great expectations for Iran, where it got 49% of a second network licence last year.
Nhleko said the Investcom deal was not done as a defensive move — there has been speculation about MTN as a possible takeover target. Nevertheless, a consequence of the expansion is that it has become more difficult to swallow.
“We plan our lives and business strategy to create value, and any takeover would not be a management, but rather a shareholder, decision.
“But given our size today, all we are saying is that because the company has grown, it becomes difficult,” Nhleko said.
He estimated that no more than four existing companies would be able to take over a company of MTN’s current size and value.
It took investors more than a day to decide that the R33.5-billion acquisition of Investcom was a good thing this week.
The initial market hesitation illustrates most people’s difficulty in knowing what to make of the biggest strategic decision of Nhleko’s career.
Nonetheless, it would seem to be a coup to get access to 10 territories in Africa and the Middle East, the core of MTN’s emerging-markets strategy.
Nhleko admits this is “not the cheapest deal in the world”. It is about 60% more than MTN could have paid for Investcom before it listed in October last year, although this was not an option at the time.
Nhleko has had his eyes on Investcom for much longer than the three weeks it took to pull the deal together.
He approached Investcom’s Beirut-based controlling shareholder, M1 Limited, some time last year. But M1 was keen to list (in London and Dubai) at that stage and wanted to make some acquisitions, so the two companies could not come to terms.
After the listings, MTN made a new approach and sealed the deal in record time.
The bulk of Investcom’s key management work out of Beirut and Paris, but Nhleko negotiated with M1 in London and Johannesburg, and concluded the deal in SA. He has, according to a colleague, been surviving on less than 10 hours’ sleep a week.
MTN is paying for strategic opportunity. In West Africa, where there are four big markets — Nigeria, Ghana, Ivo
ry Coast and Senegal — it is now in three. And, in the east, Sudan has big potential. “Although there are geopolitical issues, it will be a player going forward and we are buying at a stage when there are still greenfields operations; so the growth is yet to come,” Nhleko said.
In the Middle East, MTN extends its grasp beyond Iran to Syria, Afghanistan and Yemen.
“The strategy from a footprint perspective is, in my view, important. Also, penetration is less than 9% in all these new countries, so there is huge potential growth,” Nhleko said.
The Investcom deal represents a significant shift in strategy for MTN, which has always chosen to start its own operations in new territories rather than buy.
“There are very few greenfields opportunities left,” Nhleko said. “Iran, possibly outside China and India, is the single biggest [one] left. If someone shows me that [kind of] opportunity I will be happy to see it.
“So we have moved to an M&A focus.”
Inet-Bridge
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