Abu Dhabi, UAETuesday 25 June 2019

MTN braces for Iran headwinds but set to weather storm

Africa's largest mobile carrier may be hit short-term by US sanctions but it is unlikely to withdraw from what is potentially a huge market

Ralph Mupita, chief financial officer of MTN Group. The firm will probably stick with Iran. Waldo Swiegers/Bloomberg
Ralph Mupita, chief financial officer of MTN Group. The firm will probably stick with Iran. Waldo Swiegers/Bloomberg

Renewed US sanctions on Iran will hurt South African mobile carrier MTN and the company warned it will once again struggle to repatriate revenue but it looks unlikely to pull out of what is a lucrative market for the operator.

“These sanctions may limit the ability of MTN Group to repatriate cash, both dividends and loans, from MTN Irancell,” the company said in a statement to shareholders.

Johannesburg based MTN is Africa's largest mobile carrier and also holds a portfolio of investments in the Middle East, including a 49 per cent stake in MTN Irancell, Iran's second-largest mobile operator.

The US decision to withdraw last week from the multilateral Joint Comprehensive Plan of Action (JCPoA) agreement and re-impose economic sanctions against Iran will limit MTN’s progress in repatriating the accumulated dividends and loans that had previously been frozen in Iran by prior international sanctions as well as current revenue.

The company has at least $200 million locked up in the country that it is struggling to repatriate because of foreign exchange restrictions imposed by the Central Bank of Iran. At the end of the previous round of sanctions that ended early 2016, MTN had around $1bn trapped in Iranian bank accounts.

Sanctions could mean foreign banks are barred from doing business with their Iranian counterparts. MTN, like many foreign operators in the country, would switch its Iran revenue through banks in Dubai, before transferring it home to South Africa. If these banks and other international banks are barred from doing business with Tehran, MTN will have few means of moving its cash out of the country.


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Even after previous sanctions ended, foreign currency shortages in Iran put a brake on transfers. Companies were obliged to do currency swaps with investors bringing funds in. So they had to wait for an investor wanting to bring in large amounts of forex into Iran, and move out the equivalent amount to offshore banks.

A new round of sanctions marks the latest in a troublesome but potentially profitable investment for MTN in Iran, a company which specialises in emerging markets that many competitors baulk at. In 2014 it acquired a 20-year licence in Syria, for instance, and is also the largest operator in Nigeria.

MTN's entry into Iran was controversial from the start. The company secured an Iranian licence in 2005, but was quickly accused by rival Turkish carrier Turkcell of having bribed Iranian officials to secure the deal. MTN has strenuously denied the claims, but this has not stopped the Turkish firm from relentlessly pursuing court action against the South African company.

Turkcell has taken the matter to courts in Europe and lately in South Africa itself. Last year Turkcell lodged what was the fifth round of legal action, a claim of $4.2bn in damages in a Johannesburg court. MTN in turn has accused Turkcell of "harassment". The court action is ongoing.

In spite of the difficulties of operating in Iran, MTN is unlikely to back out anytime soon. Most investors bet that the current regime will, sooner or later, bend or be swept away.

"You would assume that, over time, the Iran-US relationship will normalise and that Iran will not be seen as the biggest “sponsor of global terrorism” as the current administration in the US views it," said Wayne McCurrie, senior portfolio Manager at Ashburton Investments in Johannesburg (Ashburton does not hold MTN shares).

This means MTN will, at some point in the future, be able to repatriate its profits. For long-term investors, the timing of Tehran's return to the international fold is less important.

Meanwhile, Iran is a potentially wealthy nation with a young population where mobile phone penetration is growing fast. There are now more than 80 million mobile subscriptions and 41 per cent of households are estimated to have access to at least one smartphone, according to Euromonitor International.

A flagging Iranian rial is also unlikely to concern MTN shareholders much, Mr McCurrie said. The company is viewed as an emerging markets play, which is how many technically see Iran as well.

MTN has had a difficult history in Nigeria, too, including a $5.2bn fine slapped on it in 2015 for failing to meet government demands to deactivate accounts of users who were not officially identified.

Even MTN's announcement that it may face difficulty repatriating its Iranian funds did little to move the share price, which lost just over half a point on the day it made its comments.

"Putting everything else aside for the moment, this is a fantastic market to be in for MTN," Mr McCurrie adds.

"A large population, low penetration of phones with good growth potential over the longer term. Iran, assuming a return to “normality, is a very good investment for MTN and they should not sell Irancell now".

Updated: May 12, 2018 01:34 PM