The succession dilemma

Phuthuma Nhleko, MTN Group’s president and CEO since 2002 is set to stand down as of March 31, 2011. He has been instrumental in driving the South Africa mobile operator to the apex of the industry on the continent, leaving whoever is selected to succeed him with a colossal legacy to continue

The replacement of outgoing MTN Group CEO, Phuthuma Nhleko is set to be confirmed in the coming month or two. Nhleko’s tenure ends March 2011

From the moment that Phuthuma Nhleko announced his intention to stand down as the head of MTN Group at the beginning of March this year; speculation has been rife about his choice of successor. Such a decision is a not a straight forward one, given the myriad of power brokers involved in the business of MTN Group and the ever present Black Economic Empowerment (BEE) dynamics that are now firmly entrenched in corporate South Africa. MTN has impeccable BEE credentials, which it would be no doubt keen to see reflected in the passing of the leadership baton from one competent indigenous manager to another. Whether this will be possible remains to be seen.

Speaking at the announcement of the operator’s interim results in the middle of August, Nhleko indicated that a decision regarding his successor ought to be made in the coming month or two.

“It’s a matter of urgency, we do understand that,” Nhleko said. “We will deal with that in the next month or two.” Nhleko also said the board, led by veteran BEE champion Cyril Ramaphosa as chairman, was drawing to the end of the selection process.

Should Nhleko’s successor be in any doubt of the size of the job he will assume, MTN’s H1 2010 results offer a clear indication. The operator reported an 11.4 per cent increase in aggregate users, to 129.2 million subscribers to end-June. Group revenue stood at ZAR56.0 billion (US$7.7 billion), down 2.2 per cent year-on-year, while earnings before interest, tax, depreciation and amortisation (EBITDA) decreased by 1.1 per cent to ZAR24.2 billion compared to the same period a year earlier. The operator said first-half profit increased 6.2 per cent to ZAR8.1 billion.

MTN’s South and East Africa unit was the only operation to report an increase in revenue for the period: ZAR20.56 billion up from ZAR19.4 billion a year ago, an increase of six per cent. By contrast, MTN’s West and Central Africa operation saw revenues decline from ZAR26.76 billion to ZAR24.72 billion year-on-year – a decrease of 7.6 per cent.

The Middle East and North Africa region witnessed a revenue decrease from ZAR11.06 billion to ZAR10.66 billion for the same period, representing a slide of 3.6 per cent. The West and Central Africa operation counted the largest subscriber share for the period, with 59.36 million customers. In the Middle East and North Africa MTN reported 41.19 million subscribers, whilst the group’s South and East African operation counted 28.66 million users.

“The MTN Group delivered a sound operational performance for the six months ended June 30. This was the result of a solid performance in all aspects of the business, aided by high quality networks, robust and competitive distribution channels, attractive segmented product offerings and an increased focus on value added services,” commented Nhleko.

MTN’s H110 results and corresponding commentary makes it clear that the operator’s strategy is in a state of flux as Nhleko prepares to depart. Having failed to ratify acquisitive deals with India’s Bharti Airtel and Egypt’s Orascom Telecom over the past 12 months, MTN announced it would pay an interim dividend for the first time. The announcement breaks the pattern of MTN having staved off the award of dividends as it pursued significant investments, such as the US$5.5 billion acquisition of the Mikati family’s Investcom in 2006.

Over the past five years MTN has been amongst the most aggressive telecom operators in the M&A arena in Africa, with the size of its ambition first being recognised in its failed bid for Celtel International, which was ultimately picked up by Zain Group at the start of 2005 for US$3.4 billion.

MTN bounced back from the Celtel set back with the acquisition of Investcom the next year, before having protracted and ultimately fruitless talks with Bharti Airtel regarding a merger of equals. Most recently, MTN tapped Orascom Telecom with respect to its African operations, with specific interest in the Egyptian operator’s asset in Algeria – Djezzy.

“When Orascom was on the table, it was because Orascom was on the table, it wasn’t because I was going to be leaving,” Phuthuma told a talk radio station in South Africa recently, when asked whether the pace at which deals were being assessed given his impending departure had increased. “Unfortunately, as you know, the Algerian government said they wanted to buy their (Orascom’s) assets and wanted to exercise their pre-emptives, which was a little bit unfortunate for us but that’s where we are. We’re not going to do something just to do something before March but who knows what could happen.”

South Africa’s domestic market leader Vodacom underwent a similar break from its leadership past in October 2008, when Pieter Uys took over from founding CEO Alan Knott-Craig. Strategic lapses in the last third of Knott-Craig’s 15-year tenure as CEO saw Vodacom usurped as the leading African mobile operator by MTN Group, and over the past two years Uys has been looking to recapture some of Vodacom’s relevance in the rest of Africa.

“We are hopeful that Vodafone will see Vodacom as its vehicle into Africa and involve us in everything that it does here on the continent,” Uys told Comm. exclusively, at the start of his tenure as CEO. “This will not extend to the old investments that they have like Kenya and Ghana, but will be related to what is happening on the continent with the big players like Zain and MTN. It is becoming more critical for us to have a larger footprint, and we don’t need direct access and investment in all markets to have that footprint,” he added.

Pieter Uys took over from founding Vodacom CEO Alan Knott-Craig in October 2008, and was an internal successor at the mobile operator

In the two years since Uys took over Vodacom, the operator has not embarked on any significant M&A activity, aside from the acquisition of 100 per cent of Gateway Communications at the end of 2008 for US$700 million. Gateway is one of Africa’s largest providers of interconnection services via satellite and terrestrial network infrastructure for both African and international telecommunications companies. Gateway also provides an extensive range of high quality, end-to-end connectivity and enterprise communications solutions to large African and multinational corporations operating across the region.

In its trading update for the quarter to end-June, Vodacom reported that its international operations (comprising Tanzania, Mozambique, Democratic Republic of Congo, and Lesotho) combined recorded strong customer growth of 15.8 per cent year-on-year to 14.6 million. Vodacom added almost one million customers in the quarter mainly from Tanzania where the market responded well to newly introduced tariff plans.

Revenue in the international mobile operations in constant currency declined by 0.4 per cent. Including the effect of foreign exchange movements, revenue declined 14.5 per cent to ZAR1.92 billion.