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MTN acquired Investcom LLC for US$5 billion.
Investcom contributed over 8 million of the Group's 40 million subscribers. |
Group President and CEO's report
Overview
The MTN Group today is a vastly different
organisation to the one I reported on a
year ago. While the scale and scope of
operations have increased substantially,
the focus of our Group remains in place
- we are rapidly becoming the leading
provider of telecommunications in
emerging markets, giving voice to over
40 million people.
The MTN subscriber base grew 73% to
40 million during the 12 months to
31 December 2006 on strong growth
in most markets, notably Nigeria (up
47%) and South Africa (up 22%). Total
subscribers include 8,4 million subscribers
of the former Investcom operations which
have been consolidated since acquisition
in July 2006. Subscriber bases increased
by 26% and 80% respectively in the
South and East Africa (SEA) and West and
Central Africa (WECA) regions. Total Group
subscribers also include an additional
4,9 million subscribers in the Middle East
and North Africa (MENA) region.
Trading conditions in most countries
where MTN operates remained
challenging with increasing competition
from local, regional and international
operators. Tariffs continued to decline
across all our markets as acquisitions
were increasingly achieved on deeper
penetration of addressable markets. As a
consequence, average revenues per user
(ARPUs) have declined in most operations.
Interest rates in most major operations
remained steady, while increased lending rates in South Africa have not significantly
affected consumer spending.
Group revenue increased by 49% for
the period, with contributions split
52%, 41% and 7% among the SEA,
WECA and MENA regions respectively.
Attributable earnings for the period were
R10,6 billion, compared to R5,9 billion for
the nine months ended December 2005.
The Group EBITDA margin was strong
at 43,4% as initiatives to drive operating
efficiencies propelled savings in operating
units, especially in Nigeria.
Investcom operations contributed
R5,9 billion or 12% of total revenue for the
year since acquisition in July 2006. These
results have underlined the benefits of
MTN's expansion strategy in diversifying
the revenue base through strategic
acquisitions in emerging markets.
Key objectives for the past period
The MTN Group has made good progress
on the strategic objectives set at the
beginning of the year:
Continue to identify and pursue valueenhancing
expansion opportunities to
consolidate our position and diversify
earnings - the MTN Group has established
itself as a leader in telecommunications in
emerging markets with the acquisition of
Investcom LLC, broadening our operating
footprint to 21 countries in Africa and the
Middle East. The US$5 billion acquisition
has, however, had a significant impact on
our debt profile in the short to medium term. While the integration of Investcom
has been smooth, management's focus
will be on reducing our net debt level
to approximately 0,4 times EBITDA by
the end of 2008. During the year, we
launched commercial operations in Iran
and Afghanistan, and Sudan completed
its first full trading year. The MTN Group
will continue to explore expansion
opportunities where these have a strategic
and significant positive impact on the
Group's earnings in the medium term.
Managing the Investcom integration - the
key aspects of the integration project
were formally concluded at the end of
October 2006. The broad objectives were
largely achieved, including the alignment
of Investcom processes to MTN standards
and disciplines. The rebranding
programme for these operations has been
finalised and will be launched in most
countries during 2007, together with new
products and value-added services to
capitalise on opportunities and maximise
impact. Group-wide procurement
benchmarks have been established and
opportunities identified for significant
cost reduction in both network capital
expenditure and operating expenses over
the next two years.
Most importantly, the Investcom
acquisition has added significant depth
to our management teams as well as
professional and telecommunicationspecific
skills. In such a rapidly developing
market, this is a considerable competitive
advantage.
Regionalisation - the strategy we initiated
in the prior period has shown encouraging
results. We have established three unique
regions in our portfolio which form the
basis of our hub and cluster strategy
to drive operating focus, synergies and
efficiency.
Improve operational cost efficiency and
expand margins to take full advantage of
scale across our operations - the least-cost
operator approach is now embedded at
operating unit level and has promoted
a strong cost-reduction culture across
the Group. Key performance indicators
are reviewed for all operating units and
benchmarked across the Group to drive
efficiency in spending and roll out best
practices in our operations.
We are now assessing outsourcing certain
functions of the business, culminating
in the development of a new business
model. This model should enable us to
achieve our Group EBITDA margin target
of 45% in the medium term, even though
the Group margin will be diluted by
lower margin contributions from Iran and
Syria due to high revenue-share licence
commitments.
Manage ambitious network roll out in the
Islamic Republic of Iran - MTN Irancell
launched commercially on 21 October
2006 with a network capacity of
450 000 covering Tehran (46% population
coverage), Mashad and Tabriz and
connecting 154 000 subscribers by yearend.
The launch was a postpaid-only offer.
At launch, the distribution infrastructure
included nine dealers and 500 primary
points of sale. Internally, call centres,
enterprise resource planning systems,
customer care (unique in Iran) and sales
support were all in place. By year-end,
the distribution network had trebled and
network infrastructure rolled out to cover
16% of the population of 70 million.
MTN Group results
MTN's performance for the 12 months
ended December 2006 was solid with
revenue and profits strongly up on the
prior year. Revenues at R52 billion were
49% above the previous year as a result of
subscriber growth and the consolidation
of former Investcom operations. EBITDA
was R22,4 billion, up 53%. Group
profit after taxation of R12 billion was
32,4% above the previous year on higher
revenues and functional currency gains
as the rand weakened against foreign
currencies.
MTN South Africa (48%) and MTN Nigeria
(29%) contributed 77% of total revenue,
down from 91% in 2005 following the
consolidation of Investcom operations
at Group level. Investcom operations
contributed 12% of total revenues for
2006. MTN's international operations
increased their contribution to Group
results during the period and now
account for 52% of revenue and
63% of EBITDA, up from 43% and
55% respectively at the end of the
previous period. These results support ongoing initiatives to diversify our
revenue and earnings base.
Total assets at 31 December 2006
increased by 116% to R96,9 billion.
Net debt as a result of the Investcom
acquisition was R22,9 billion with the
debt/equity ratio at 77,2% and net
debt/equity ratio at 53,6%.
Operational review
South and East Africa
MTN South Africa has maintained market
share during the year and increased
subscribers by 22% to 12,5 million. The
pre-paid value proposition introduced
during the year in combination with
lower-denomination airtime vouchers
have resulted in a very strong performance
with pre-paid ARPU increasing to R94 from
R93 in the previous year. Constructive
discussions on the interconnect cost/tariff
structure are continuing with ICASA.
Our focus on the consumer, corporate and
reseller business units has resulted in a
more efficient distribution channel and a
broader distribution base.
MTN Uganda, Rwanda and Swaziland
all recorded strong subscriber growth of
62%, 40% and 26% respectively. These
operations have all maintained EBITDA
margins in excess of 50%.
The infrastructure roll out in Zambia
gathered pace in the latter half of the year,
resulting in strong subscriber growth of
93% for the year.
West and Central Africa
In September, MTN Nigeria introduced
a new pre-paid value proposition, with
a number of new tariff plans at reduced
rates, each targeting specific segments
of the market. Subscribers increased
by 47% to 12,3 million with 3,9 million
net additions for the year. Significant
acquisitions were recorded in the second
half of the year following the introduction
of the new product plans.
The majority of new additions continue
to be connected at the low end of the
market resulting in slightly lower ARPUs of
US$18, down from US$22 for the previous
financial period.
MTN Nigeria launched its ultra-modern
fibre optic transmission backbone in
October 2006. The network is one of
the largest of its kind in Africa and spans
3 500km. It will provide MTN Nigeria
with a competitive advantage and
potentially redefine service delivery
in the Nigerian telecommunications
sector. In December 2006, MTN Nigeria
acquired VGC Communications as a
strategic platform to expand its presence
in the corporate market. The acquisition
will give MTN MAN (Metropolitan Area
Network) the ability to deliver high
bandwidth, reliable data and advanced
voice service to corporate customers in
the key cities of Lagos, Port Harcourt and
Abuja. VGC Communications' assets and
customer base will also give MTN Nigeria
immediate traction in the corporate market and provide a high quality service.
Post year-end, Nigeria was awarded a
3G licence for US$150 million.
MTN Ghana remains the biggest operator
in the country with 2,6 million subscribers
and a market share of almost 52%. In the
second half of 2006, management's focus
was on the expansion of network capacity
and the improvement of network quality.
Some 357 BTS sites were commissioned in
the six months, bringing the total to 965.
MTN Cameroon and MTN Côte d' Ivoire
experienced subscriber growth of
43% and 50% respectively. Cameroon
increased market share during the year
to 58% while Côte d' Ivoire secured a
significant position in the important
single-call market. The majority of
subscriber acquisitions in Côte d' Ivoire
occurred in the second half of the year as
integration synergies and organisational
changes took effect.
Middle East and North Africa
Iran, Afghanistan and Sudan in the MENA
region are operations with the greatest
growth potential in the Group.
Since commercial launch, MTN Irancell
has expanded its network coverage to
eight cities at December 2006 and has
rolled out some 361 BTS stations covering
16% of the population. From commercial
launch in October to the end of December
2006, 154 000 postpaid subscribers were
connected. Subsequent to year-end, MTN Irancell launched pre-paid services
to meet competitive market challenges.
The pre-paid launch was at a connection
fee of approximately US$25, representing a
significant discount to the prevailing price
for postpaid SIM cards of approximately
US$150. The launch of the pre-paid offer
has accelerated subscriber acquisition,
which exceeded 1 million at the end of
March 2007.
Afghanistan commenced operations in
August 2006 and has rolled out 155 BTS
sites. The operation has connected
218 000 subscribers in the five months
since launch. The most significant
challenge in this operation remains the
network roll out.
Sudan has completed its first full year of
operation and connected over 1 million
subscribers with market share of close to
25%. The acceleration of the network roll
out in advance of the third competitor
entry remains a key focus.
Investment and expansion strategy
Geographic expansion during the year
was achieved through the Investcom
acquisition which increased the Group
footprint from 11 to 21 countries. This
was a significant step forward in our
strategy to be the leading provider of
telecommunications services in emerging
markets. Today, the MTN Group spans
21 countries with a combined population
of over 500 million.
The Group has also increased its stake
in Côte d' Ivoire by 17%, Mascom
(Botswana) by 7% and Uganda by 45%, for
a combined sum of R2,1 billion. The Group
increased its shareholding in Nigeria by
7% at a cost of R2,7 billion.
Sustainability performance
Sustainable development has long been a
cornerstone of our business and approach,
given the close relationship between
mobile telecommunications and quality
of life. At industry level, MTN is making
a material contribution in developing
appropriate regulations in different
regions, believing that free-market
principles will best support entrepreneurial
development and the significant multiplier
effect this can have on individuals and
communities. We also believe that
corporate citizenship and economic prosperity can be extended to more
citizens in every territory by increasing the
percentage of local procurement in almost
all areas of operation.
At present, there are MTN foundations
funded by after-tax profits active in three
countries. These foundations address
relevant social and educational priorities
in each country and, where appropriate,
combine traditional marketing activities
with corporate citizenship. These are
detailed in the sustainability review section
of this report.
In each country, MTN's policy is to support
local suppliers wherever possible and to
the fullest extent. In Nigeria, for example,
recharge cards are now locally sourced,
generating employment, contributing
to the domestic economy and
producing savings that are passed on to
MTN subscribers to keep tariffs affordable.
Corporate governance
The MTN Group board of directors
was reconstituted during the year to
align more closely with best practice in
corporate governance by appointing more
independent directors.
Our people
The MTN Group now has a workforce
of over 14 000 that fully reflects the demographic diversity of our markets.
The addition of skilled and experienced
Investcom teams is an important
advantage in an industry so reliant on
specialist skills. Importantly, the cultural
fit between the teams ensures that
we can rapidly move ahead as a larger
multinational organisation with arguably
the strongest base of human capital in
our operating jurisdictions. Training and
development plays an important role in
achieving our business targets, accounting
for some 5% of our total payroll cost
each year. This includes a comprehensive
succession strategy to align resources with
strategic objectives.
In South Africa, MTN conforms to the
requirements of the industry charter of
economic empowerment and has been
independently recognised as a leading
empowerment company. During the year,
MTN was rated progressive company of
the year at the prestigious presidential
awards for business leadership of the
Black Management Forum.
At operating unit level, Ahmad Farouk
was appointed CEO of MTN Nigeria and
Amiable Mpore CEO for MTN Côte d'Ivoire.
Brett Goschen moved from chief
financial officer of MTN Nigeria to CEO
of MTN Ghana. Given the expanded
responsibilities of the chief operating officer in the enlarged group, Sifiso
Dabengwa has returned to South Africa.
In line with the strategic change to a
more regional structure, Christian de Faria
and Jamal Ramadan were appointed
vice presidents for the WECA and MENA
regions respectively. Sifiso Dabengwa,
the Group COO, is currently acting as vice
president for the SEA region.
The MTN Group has been characterised by
the spirit of its people since its formation -
energy, passion and dedication permeate
our operations, at times against formidable
challenges. Your loyalty and enthusiasm
continue to inspire as we strive to reach
our business goals. I thank every one
of you for your valued contribution to
making the Group what it is today - a
leading provider of telecommunications
services in emerging markets.
I also thank the board members for their
guidance and unwavering support.
Looking ahead
Setting and achieving challenging targets
is becoming an MTN hallmark. For 2007,
our strategic priorities include:
- Completing the final elements to
integrate acquisitions that complement
our expansion strategy
- Optimising regional synergies and
ensuring strategic regional focus
through a hub and cluster structure
- Continuing to pursue appropriate
expansion opportunities to further
diversify earnings and consolidate our
position
- Improve operational efficiency through
our least-cost operator strategy and
explore outsourcing to improve the
business model
- Take advantage of money transfer
and mobile money opportunities in
MTN Group markets.
Phuthuma Nhleko
28 March 2007
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