MTN bets the farm on financial services - TechCentral

MTN bets the farm on financial services

hilton-tarrant-180What more is there to say about MTN? It’s been an especially horrific 12 months for the company (and shareholders). But the group is sitting with a very large problem (to be fair, it has many others, too): it is increasingly almost wholly reliant on three operations: South Africa, Nigeria and Iran.

On an Ebitda basis, the first two accounted for 70% of group profits in the six months to 30 June 2016 (add Iran in, which it doesn’t because of equity accounting rules, and that edges up to 73%). Put another way, R70 out of every R100 in profits made by MTN across 22 countries was earned in just two of them.

The group, for the first time, explicitly acknowledged this in the release of its 2015 financial results in March, saying that “earnings remain highly concentrated in a few markets with the associated volatility and risks as evident over the past few years. To this end management will continue to explore opportunities to address this over the medium term.”

This is not a surprise to anyone, least of all MTN Group management, but the execution by former CEO Sifiso Dabengwa of the group’s vision of “leading the delivery of a bold, new digital world to our customers” would be best described as sleepwalking. It’s fiddled around the edges, searching for growth in new areas with precious little to show for it. Nothing has moved the needle and there is no indication that any of the moves it’s made to date will in the medium term.

Even mobile money, the much heralded “saviour” of operators in emerging markets, remains relatively small. Revenue is up by 41% in the first six months, but R1,3bn equates to just 1,6% of the group’s reported turnover (and that’s to say nothing of profitability). MTN remains a mobile operator, with mobile data being the only real source of strong revenue growth.

In recent months, it’s announced two significant (and directly related) moves that it hopes will go a long way to solving its biggest problem.

Two primary executive appointments have made the market (and competitors) sit up and take notice. The first, rather obviously, is the appointment of Rob Shuter as group president and CEO (by latest 1 July 2017). Related is the appointment of Stephen van Coller as vice-president of strategy and mergers & acquisitions, effective 1 October 2016 (and Kholekile Ndamase as his deputy).

Shuter joins from a year long stint on the Vodafone Group executive committee, where he assumed additional responsibility for its smaller operations in Europe. He has been CEO of its unit in the Netherlands since 2012, and was previously chief financial officer at Vodacom for a two-year period.

Prior to his move to telecommunications, Shuter was at Nedbank for about a decade, first as head of M&A and then as managing executive for its retail unit. He also has M&A experience under his belt from his time at Standard Bank, and crucially worked with Phuthuma Nhleko at the bank.

Van Coller has been CEO of corporate and investment banking at Barclays Africa Group (previously Absa) since 2009. He joined the group in 2006, having previously headed up a unit of the local Deutsche Bank operation. His career move is telling, and MTN (again, explicitly) detailed why he would be joining: “His substantial commercial experience will assist in the formulation of a revised strategy for MTN, particularly in the area of convergence between mobile telephony and financial services.”

And, Ndamase, former head of equity financing at RMB, joins the group as deputy head of M&A. This is an astonishing turnaround for the company, which until now has had these critically different and important roles of strategy and M&A somehow merged into one (“group chief strategy, mergers and acquisition officer”).

And MTN is already off to a flier, especially when compared to the four-and-a-half years under Dabengwa.

Its second big move was last week’s announcement of a “deep and fundamental strategic review of its operations and processes”. In this, it was clear that “new revenue streams are expected to increase their contribution to revenue over the next 12 to 18 months”.

It’s also resolved not to make the same mistakes as practically every other major operator globally, and will “embark on a process of housing new revenue streams, particularly digital services, outside the core business. This will allow for more agility and greater flexibility to accelerate growth in these areas.”

Incoming MTN CEO Rob Shuter

Incoming MTN CEO Rob Shuter

I’ve argued previously that mobile operators don’t know how to be anything other than mobile operators, and that stands. Every decision is premised on defending average revenue per user (simplistically). That MTN is going to set “house” these new revenue streams outside of its core business means it’s come to this realisation, too. How successful it is in keeping these separate will impact directly on whether it can (and will) make the bold decisions that mobile operators are inherently incapable of making.

Given the backgrounds and experience of Shuter, Van Coller and Ndamase (banking is in their DNA), as well as MTN’s colour around (specifically) Van Coller’s appointment, I can see only one outcome: there will be M&A activity, and it will be in financial services.

Realistically, this is the only area that’s big enough to move the needle for MTN. Video always seems tantalising, but this tends to work better on the traditional cable TV model in more developed markets (plus, in Africa, there’s only one game in town).

But success in financial services is not a forgone conclusion. Outside of East Africa, the penetration and profits of mobile money services remain low. And retail banking across the continent is not the cash cow some might think — just ask Standard Bank. This would need to be a move unlike any other seen in this sector to date and it would need to ideally be outside of those three countries its overdependent on, at least for now.

An online payment service provider/processor wouldn’t be a stretch at all (but how big an impact would that have?). An entire bank is probably not on the cards (not least because of the regulatory and capital issues), but you wouldn’t discount a proper (and aggressive) joint venture with an established player on the continent, would you?

  • Hilton Tarrant works for immedia. This column was first published on Moneyweb and is used here with permission

9 Comments

  1. Greg Mahlknecht on

    MTN have f***ed up everything else in the past few years, but i’m sure this will be different, riiiiight? 🙂

    > Given the backgrounds and experience of Shuter, Van Coller and Ndamase (banking is in their DNA),

    It’s what they know, so they’ll try and turn the company’s direction towards something that aligns with their knowledge… hmm, I don’t see this ending well. This does nothing to address MTN’s main problem, which is they suck at being a telecomms operator.

    > Realistically, this is the only area that’s big enough to move the needle for MTN.

    Another way to move the needs for MTN would * gasp * being a competent telecomms operator! Is that idea too radical?

  2. Justin McCarthy on

    How are they different to VC or Cell C or for that matter any other African MNO?
    This piece is about future growth so that the group can possibly retain healthy EBITDA margins before crashing like the developed world MNOs have. Last year MTN produced 40%+ EBITDA. Compare that to Vodafone, T-mobile, AT&T which all hover between 7% and 8%. That’s the challenge, not being “better” at being a telco.

  3. Justin McCarthy on

    Greg,
    How are they different to VC or Cell C or for that matter any other African MNO?
    This piece is about future growth so that the group can possibly retain healthy EBITDA margins before crashing like the developed world MNOs have. Last year MTN produced 40%+ EBITDA. Compare that to Vodafone, T-mobile, AT&T which all hover between 7% and 8%. That’s the challenge, not being “better” at being a telco.

  4. Vusumuzi Sibiya on

    >>That’s the challenge, not being “better” at being a telco.

    For MTN, I would have to say that they need to go back to the basics of being better at being a telco.

    First opportunity I got to leave them when 8ta/Telkom Mobile launched, I jumped at and that Mobile Money offering with Standard Bank that I had did diddly squat to provide even a single moment of hesitation;

    I haven’t looked back ever since and even with their zero rated VU Max, I’m happier watching DStv Now and Netflix on Telkom Mobile. MTN needs a serious wake-up call; and the medium term focus for them should be concerned with being a better telco than VC, Cell C and Telkom Mobile in one of the two markets where –

    >>Put another way, R70 out of every R100 in profits made by MTN across 22 countries was earned in just two of them.

    …they also haven’t been the shinning example of good corporate governance as a telco in their other profitable market BTW; with a hefty fine as undeniable proof of non-compliance with the basics of being a telco as per regulator authority in that market.

    Put simply, they need to become the telco that the consumer feels there’s a vested interest in being provided with the best value service at competitive pricing; and not the company that MTN is, that’s only concerned with shareholders, the bottom line and paying fines or whatever it’s called to run operations in difficult markets.

  5. Justin McCarthy on

    You’re not saying anything I would disagree with, but my point and the point of this article is that the Group has to look beyond telco to have a long term future. Voice is a zero sum game in developed markets & will get there in developing markets as well. Mobile and fixed voice, data and internet providers will converge with the addition of other services, notably content and fintech. Being a better MNO will not secure the company’s future – only a bigger share of a shrinking pie.

    And yes, 70% of profit does come from 2/22 markets, it’s still far more diversified than VC (90% from one market) and CC (zero profit at all).

  6. Yes it is, a very radical idea. For some reason, providing a reliable service, and no dropped calls is seen as something bad.

  7. William Stucke on

    What’s healthy about a 40% EBITDA? It’s a very clear sign of one or more of the following: –
    1 A grossly uncompetitive market
    2 Price gouging
    3 The ability to be inefficient without feeling any real pain
    4 Indifference to customers
    5 Monopoly power (think high demand spectrum …)
    6 Way past time to allow others to compete in the same space.

  8. Justin McCarthy on

    Perspective determines that answer. If you’re a shareholder it’s exceptional. If not, it’s robbery. VC has similar EBITDA margins. So did all the big players worldwide in the first decade or two. Look to govt for not introducing additional licenses earlier if you want to play the blame game.

  9. My fear is this. For years as a client I had to deal with total lunacy with their billing of services. Now they want to tackle financials services? I am sorry I cannot trust them.

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