Dialing Up Profits In Dangerous Areas

Via Wall Street Journal, an interesting look at the success – and trouble - South Africa’s MTN has found working in some of the world’s most unstable regions:

Working in some of the world’s most dangerous countries like South Sudan and Syria has made telecommunications provider MTN Group Ltd. MTNOY -3.51%bigger by some measures than its U.S. counterparts, but it also has exposed the risks of working with cash-strapped governments.

The South African company—little known in the U.S. but a juggernaut in Africa and the Middle East—has made a name for itself wading into nations dealing with war, sanctions and strife. Early successes have helped MTN, formed by media and internet giant NaspersLtd. NPSNY -4.87% and other partners at the collapse of apartheid, build up 240 million mobile phone subscribers, more than AT&T Inc. and Verizon Communications Inc.combined.

“We differentiated ourselves from other telcos by becoming a pure-play emerging-markets operator and investing substantially in sometimes unpredictable markets,” said Rob Shuter, MTN’s chief executive. “Where most see the risks, we choose to focus on the opportunities.”

In South Sudan, MTN engineers are restoring network towers along the front line of a civil war there that has left almost a half-million people dead. In Yemen, MTN’s office remains open despite Saudi Arabia-backed government forces fighting rebels amid the worst cholera outbreak ever recorded. And in Syria, MTN contractors are helping to rebuild shattered communications infrastructure flattened by fighting between the government, rebels and Islamic State.

The company’s strategy has transformed MTN into Africa’s largest telecom company, but a series of fines and actions from places like Nigeria, Iran and Cameroon has erased profit and valuation.

In 2015, the Nigerian Communications Commission accused the company of missing a deadline to deactivate more than five million unregistered SIM cards under regulations meant to combat terrorism. MTN agreed to pay a fine of 330 billion naira ($1.67 billion at the time) over three years, leading to the company’s first-ever annual loss in its 2016 fiscal year. Its share price has yet to recover.

In Iran, the reintroduction of U.S. sanctions last year hit the nation’s currency and increased inflation, hurting MTN’s business and trapping cash in the country. And in August 2018, Nigeria’s central bank ordered the company to return $8.1 billion that the bank said was moved out of the country illegally. In December, MTN agreed to pay $52.6 million to end the dispute but admitted no liability, saying it had relied on its banks to make sure the correct approvals had been obtained.

The regulatory run-ins prompted the company to modify its strategy. Last year, MTN sold its profitable Cyprus unit and said more divestments were on the horizon as it attempts to reduce debt, better manage its regulatory exposure and boost margins. In May, the company announced the establishment of an international advisory board to guide the company after its recent regulatory challenges.

 Despite the dangers, MTN continues to invest in risky countries, where subscribers are increasingly using more advanced and complex services, like data and fintech offerings, such as mobile money and insurance. In 2018, revenue from data rose 22% to 28.5 billion South African rand ($1.9 billion) and fintech revenue increased 47% to 7.8 billion South African rand.

“Yes, [these countries] are high risk, but no one else is going there,” said Samantha Hartard, co-portfolio manager of the $1.74 billion Discovery Balanced Fund, which is managed by Investec Asset Management and has a position in MTN.

The danger is real in these countries. Last year, three of MTN’s contractors were ambushed by a roadside gang after restoring service at a tower site in South Sudan, the world’s newest nation. After robbing them, the bandits shot to death the driver and one of two engineers; the second engineer managed to escape with multiple bullet wounds. He eventually recovered.

MTN is one of few multinational companies in Juba, the capital of South Sudan, where Kalashnikov-wielding soldiers spend their days lounging under trees outside of government buildings pockmarked with bullet holes.

Inside MTN’s office there, rows of engineers monitor the network, making remote fixes and dispatching teams to sites where locals—including at times government officials or police—have helped themselves to generator fuel, batteries or solar panels, according to MTN employees and contractors, taking the network offline.

“These same people who give us a headache, they say we need the site to be on air,” said Stephen James, MTN South Sudan’s stakeholder and dispute manager, shaking his head. “This is a business. It’s not a charitable organization.”

MTN is going ahead with a $30 million investment in South Sudan this year to install infrastructure, towers, sites and equipment. The company has invested about $286 million in the country since its founding in 2011 through December, according to MTN South Sudan Chief Financial Officer Phindile Mantimakhulu.

MTN, though, has had to weather gunfights in the capital that forced it to evacuate its expatriate staff in 2016 via armored vehicle to a waiting chartered jet, while government soldiers shot at U.S. diplomats and looted a U.S.-funded aid-agency base. “It was chaos,” said Khumbulani Dhlomo, MTN South Sudan’s acting chief executive.

The most constant issue, though, isn’t the risk of violence, Mr. Dhlomo said, but simply getting everyday, mundane tasks completed. “It tests your patience,” he said.

Despite the risks, MTN remains focused on the long term in places like South Sudan, Afghanistan and Iran.

“If there is peace, all these markets are there for the taking,” said Saint Hilary Doe-Tamakloe, MTN South Sudan’s chief commercial officer. “They cannot fight forever. That is the game MTN is playing.”

This entry was posted on Thursday, August 15th, 2019 at 3:25 am and is filed under Iran, Yemen.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.