MTN’s black economic empowerment (BEE) shareholders are in for a turbulent few months between now and end-November, when the MTN Zakhele scheme unwinds.

Less than two weeks after MTN released a circular outlining details of the unwinding process, the underlying value of MTNZ shares slumped more than 20% – from the illustrative value of R76 referred to in the circular – to just less than R60.

On Tuesday, the MTN share price recovered some of the ground lost since the circular was compiled (when the MTN share was trading at R133.10).

However, given the uncertain outlook for the sector and the prospect of a substantial block of MTN shares being pumped into the market between now and October 21, it’s unlikely BEE shareholders wanting to cash in their investment will realise the R76.

According to the circular, MTNZ holds 75.4-million shares in MTN, which were valued at just more than R10bn, equivalent to R133 per MTN share. That block of shares is now worth a little more than R8.6bn.

One investor who runs a BEE fund says the attraction of MTNZ has been diluted by the way in which the scheme is being unwound. “At the current MTN share price our exit price for MTNZ will be around R60, which is not bad for the initial R20 investment we made and held for five years,” said the investor, who did not want to be named.

“But by not fixing the price at which we exit – or even tying it to a 90-day average price – we are facing a period of extreme volatility,” said the investor.

He argues that the effect of that volatility has been aggravated by MTN’s announcement that, as part of the unwinding, MTNZ will be selling an unknown chunk of MTN shares into the market between now and end-October.

The proceeds from this sale will be used to pay out the BEE investors who want to cash in their investment.

How many MTN shares are to be sold will be determined by how many BEE investors want to cash in. The uncertainty of the exit price, in a weak share price environment, also creates challenges for MTNZ shareholders who want to reinvest in the new MTN Zakhele Futhi scheme.

The price for MTN Zakhele Futhi shares has been set at R20. Continued weakness in the MTN share price (and therefore the exit value of MTNZ) reduces the potential for MTNZ to reinvest in the new scheme.

The MTN Zakhele Futhi prospectus, which was released days after the MTN Zakhele circular, uses an underlying MTN share price of R125.31 as the basis for its valuations. Based on this share price, the underlying value for MTN Zakhele Futhi shares is R33.50.

This means BEE investors are getting an attractive discount.

However, the weakness in the share price since the prospectus was released means the discount has almost halved.

“This is still attractive, but not nearly as attractive as the company had initially intended, and then there’s the three-year lock-in period with no trading, followed by five years of BEE-only trading,” said the BEE fund manager.

Craig Gradidge of Gradidge-Mahura Investments says the volatility between now and the maturity date of the MTNZ scheme is to be expected.

“As you get closer to the maturity date of any asset, the price volatility will always increase.”

He said the unwinding of the MTNZ scheme and the prospect of an unknown quantity of MTN shares coming on to the market was unlikely to affect the MTN share price. “There will only be a limited number of shares sold into the market, there are more general reasons behind the weakness in the MTN share price,” said Gradidge.

MTN’s head of investor relations, Chris Maroleng, said the group was doing road shows and intended to communicate with as many current and future investors as possible.

He believes the BEE investment opportunities provided by MTN have a positive effect on the share price, “but we’re not sitting back and waiting for (negative) perceptions to be created,” said Maroleng.

The frustrated BEE fund manager is not convinced. “Certainly the sector is under pressure, but MTN has been through a particularly torrid time and has a long recovery road ahead of it. If it is successful, the sloppiness of the unwinding process will be forgotten, but it seems unnecessary.”

•By Ann Crotty/Business Day South Africa.

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