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MTN today - Contents

Group Chief Executive Officer’s report

Phuthuma NhlekoOVERVIEW

Subscribers surged 48% to 23,2 million, revenue increased to R27,2 billion and EBITDA margin was maintained at 41,3%. Our expansion strategy has borne fruit, yielding investments in five developing markets and paving the way for continued organic growth.

Throughout the African continent, mobile penetration continues its rapid increase as competition stiffens and the cost of entry for subscribers decreases.

As one of the most dynamic and challenging sectors worldwide, mobile telecommunications is an industry inherently subject to rapid change on a significant scale.

In South Africa, the telecommunications sector is undergoing significant changes with rising mobile penetration, increased regulatory pressure and an increasingly competitive market. Addressing these challenges requires focus, flexibility and detailed strategic planning. It also requires a continuous focus on ways to lower operational and capital expenditure while maintaining revenue streams.

KEY OBJECTIVES FOR THE PAST PERIOD

We set strategic Group objectives for the past period, which included:

Continue identifying and exploring growth opportunities – During the period, we acquired operations in Côte d’Ivoire (51%), Zambia (100%), Botswana (44%) and Republic of Congo (Brazzaville) (100%). We concluded a 49% investment in Irancell – the second, greenfield GSM licence in that country and our first investment outside the African continent. On 2 May 2006 the Group announced an offer to acquire the entire share capital of Investcom LLC, which operates in ten countries in Africa and the Middle East. This is subject to the fulfillment of certain regulatory pre-conditions and conditions precedent including MTN Group shareholder approval.

Maintain leadership position in innovation – In South Africa, we introduced MTN Banking in partnership with leading financial services group, Standard Bank of South Africa Limited. We remain confident of the need for accessible, affordable banking services that capitalise on technology. Following extensive trials, MTN launched commercial third-generation (3G) services to South African customers. Innovative products and services introduced in various markets – such as electronic voucher distribution in Cameroon and mCharge in South Africa, as well as GPRS and MMS in Nigeria and Uganda have exceeded expectations, again emphasising the importance of addressing real market needs.

Focus on customer centricity – The vast majority of our customers require basic, reliable and affordable telephony. Accordingly, across the Group, programmes are in place to further enhance customer service and performance is measured and monitored at every level. The rapid increase in the provision of service innovations such as low-denomination electronic airtime recharge facilities, underscores the Group’s commitment to continually improving customer service and meeting customer needs. We have implemented a customer management assessment tool to measure and benchmark our effectiveness in customer centricity against international best practice.

Maintain Group EBITDA margin above 40% – MTN is a fully-fledged multinational with 43% of revenue and 49% of adjusted headline earnings per share (HEPS) being contributed by operations outside of South Africa. Across the Group, efficiencies continued to improve during the period, boosting the EBITDA margin to 41,3% against 39,8% for the nine months ending December 2004.

Improve operational efficiency – The Group continuously benchmarks its productivity and efficiency internally and against global peers. Targets are set and integrated into performance measurement and budgeting cycles.

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MTN GROUP RESULTS

The MTN Group recorded a strong performance for the nine months ended 31 December 2005, with HEPS of 338,2 cents compared to 366 cents for the previous 12-month period. Consolidated Group revenue of R27,2 billion, EBITDA of R11,2 billion and profit after tax of R6,7 billion were recorded, compared to revenue of R29 billion (R21,5 billion December 2004), EBITDA of R12 billion (R8,6 billion December 2004) and adjusted profit after tax of R7,3 billion for the year ended March 2005.

Our international operations increased their contribution to Group results during the period and now account for 43% of revenue and 49% of adjusted HEPS, up from 40% and 43% respectively in the previous period. Given the portion of revenue generated outside South Africa, Group results are directly impacted by the fluctuation of the rand against the reporting currencies of our international operations. During the period, the average rand exchange rate depreciated by between 1% and 11% against the respective currencies of our operations. Importantly, the average rand:Nigerian naira exchange rate depreciated by 6%.

Group EBITDA rose by 31% compared to the nine months ended 31 December 2004, to R11,2 billion, of which 55% was generated from international operations. All operations contributed positively to EBITDA except for MTN Zambia.

Group total assets increased by 51% to R44,8 billion at 31 December 2005. Corporate activity during the year changed a net cash position at 31 March 2005 to a net debt position of R1 billion at the end of the period. The financial performance is discussed in more detail in the Group Financial Director’s report.

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OPERATIONAL OVERVIEW

Detailed results of our operations appear in the operational review. Some of the significant factors were:
Market conditions – Favourable market conditions prevailed over the last nine months with the South African economy experiencing prodigious consumer spending led by low interest rates, a boom in the property market, strong currency and low inflation. In Nigeria, consumer spending has been encouraged by both a strong currency and record global oil prices.
Subscriber base – MTN has recorded a surge in subscriber numbers during the period, with subscribers increasing to 23,2 million from 15,6 million at March 2005. Subscriber numbers were buoyed by increases of 50% and 28% in the Nigerian and South African operations respectively. Operations acquired during the nine months accounted for 8% of total subscribers at the end of the period.
Market share – Fluctuations in market share are closely monitored in all operations and accordingly addressed through innovation, competitive pricing and customer service.
Average revenue per user (ARPU) – ARPU in the prepaid market segment has decreased as a result of a redefinition of capable subscribers and deeper mobile penetration. In Nigeria, it is pleasing to note that although there was a 45% downturn in ARPU on the previous financial year, settling at about US$22 from June 2005 subscribers increased from 5,6 million to 8,4 million. Postpaid ARPU in South Africa decreased only marginally.
Capital expenditure – Capital expenditure for the period was R6,7 billion, incurred largely by MTN Nigeria for network capacity augmentation and expansion. In South Africa R2 billion was spent, a significant portion of which relates to the 3G roll out. Across our operations, investment in network infrastructure is ongoing and funded internally from strong cash flows. In 2006, the MTN Group expects to invest R12,9 billion in the ongoing enhancement of its networks.
Regulatory pressures – As the global telecommunications industry moves towards liberalisation and convergence, the industry in Africa experiences similar, fundamental and structural challenges. The regulatory environment in South Africa is typical of this where a second fixed-line network operator (SNO) has been licensed, Mobile virtual network operators (MVNOs) are soon to enter the market, mobile number portability is imminent and a number of bills are to be tabled which may affect the industry.

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INVESTMENT AND EXPANSION STRATEGY

Geographic expansion
During the period, the MTN Group concluded acquisitions in Côte d’Ivoire, Zambia, Botswana, the Republic of Congo and a licence agreement in Iran. This is in line with our strategy of consolidating our position as the leading provider of telecommunications services in developing markets. This has increased our geographic coverage by five countries with a combined population of 105 million and a relatively low combined mobile penetration of 9%.
• In Côte d’Ivoire, we acquired 51% of Telecel Côte d’Ivoire for R1,4 billion and rebranded it as MTN Côte d’Ivoire. This company had 1,1 million subscribers at 31 December 2005 and an estimated market share of 47%.
• In Zambia, MTN acquired 100% of Telecel Zambia, renamed MTN Zambia, for R347 million. In the near future, 10% of the equity in this business will be placed in the local market. MTN Zambia ended the period with 97 000 subscribers and an estimated market share of 19% in an underserved market.
• In Botswana, MTN indirectly acquired 44% of Mascom Wireless Botswana Limited for R846 million. The investment is accounted for as a joint venture. At 31 December 2005, this company had 479 000 subscribers and a 67% market share.
• In December 2005, MTN purchased 100% of the second largest mobile operator (Libertis) in the Republic of Congo (Brazzaville) for R656 million. This company has an estimated 39% share of a market with low penetration levels, and 210 000 subscribers at 31 December 2005.
• On 21 November 2005 the Minister of Communications and Information Technology of Iran issued the second GSM licence to Irancell; a company in which MTN has a 49% shareholding. MTN advanced USD89 million to outside shareholders for their share of Irancell’s capitalisation in addition to providing EUR300 million for the licence through a long-term commerical arrangement with Irancell. With an estimated population of 69 million and current mobile penetration at 11%, the Iranian market presents a meaningful growth opportunity for MTN and marks the Group’s entry into the Middle East.

On 2 May 2006, subsequent to the year-end, the MTN Group announced an offer to acquire the entire share capital of Investcom LLC for a total consideration of USD5,5 billion with between USD3,5 billion and USD3,7 billion expected to be settled in cash and the remainder in MTN Group shares. Investcom’s largest shareholder, M1 Limited, which owns approximately 70,6% of its shares has given an irrevocable undertaking to accept the cash and shares offer and become a shareholder in the MTN Group.

Investcom currently has licences in 10 countries in Africa and the Middle East, covering an estimated population of 147 million and a weighted mobile penetration of about 9%. This transaction should enable the MTN Group to enhance its growth profile, diversify its financial profile and strengthen its operational capabilities.

This transaction is subject to the fulfillment of pre-conditions and conditions including the approval of the transaction by the MTN Group shareholders and regulatory approval in some of the countries in which Investcom operates.

The MTN Group has, and will continue to communicate developments regarding progress on the transaction to investors and shareholders.

View the transaction website for more detail>>

Mobile banking
August 2005 saw the launch of MTN Banking with Standard Bank in South Africa. Capitalising on the strength of the MTN brand, MTN Banking extends banking services to an estimated 13 million people classified as “unbanked” by using SMS technology.

Network solutions
During the period under review, MTN acquired the remaining 40% in MTN Network Solutions, a firsttier internet service provider, for R40 million. This will enhance the Group’s position in a converged telecommunications environment. Opportunities to expand our investments into other complementary businesses are ongoing.

Orbicom
MTN exited the non-core satellite broadcasting business through the sale of Orbicom after being granted regulatory and competition board approval for its disposal.

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EXTERNAL IMPACT REVIEW

Mobile telecommunications is, by its nature, closely linked to quality of life. Our operations and business conduct, therefore, are just as closely linked to a variety of external factors predicated on improving quality of life. These include initiatives to extend economic prosperity to more citizens through empowerment criteria and sectoral charters in South Africa, increasing the percentage of local procurement in almost all areas of operation and our role as a corporate citizen.

While these initiatives are detailed elsewhere in this report, and highlighted in the operational review, I believe the contribution MTN is making at industry level in the development of appropriate regulations in different regions is noteworthy. We support liberalisation of the telecommunications sector, believing that free-market principles best apply and that corporate success depends largely on anticipating changing market needs with affordable, competitive services.

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SUSTAINABLE DEVELOPMENT

Although MTN is relatively young in corporate terms, sustainable development has always been a cornerstone of our business and our approach. In the past, we have reported separately on issues relating to sustainable development. This year, however, these are integrated into our annual report to underline our belief that sustainable development and business development are inextricable, interdependent elements that determine our future. Currently the Group has MTN Foundations funded from after tax profits, in South Africa, Nigeria and Cameroon which address relevant social and educational upliftment initiatives in those countries. During January and February of this year, MTN sponsored the Africa Cup of Nations in Egypt. The title sponsorship entrenched MTN as the continental leader in football sponsorship and the success of the event brought awareness of our brand to the global community.

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OUR PEOPLE

Since inception, MTN’s people have characterised the Group – tenacity, expertise, enthusiasm and commitment combine to enable the Group to meet its operational and strategic objectives. MTN today employs 8 360 people of whom 4 036 are based in South Africa. To attract, retain and strengthen this team is an ongoing challenge that we address at multiple levels through attractive remuneration, career opportunities, succession planning and personal development.

Management changes for the period saw Ron Allard redeployed as CEO of MTN Côte d’Ivoire on 1 July 2005 from the position of CEO of MTN Cameroon. Mike Blackburn was appointed CEO for MTN Zambia from his position of CFO in Uganda as of September 2005. Mounise Quala takes up his appointment as CEO of MTN Congo Brazzaville in April 2006.

MTN has been restructured along regional lines with three executive vice-presidents reporting to the COO on West Africa, Southern Africa and Middle East, North and East Africa (MENEA). The CEOs of the operations will, in turn, report to these executive vice-presidents. These management clusters reflect the need for strategic, regional focus.

As much as our expansion strategy is founded on efficient network infrastructure, innovation and service, our business depends on people to implement every element of this strategy. I would like to take this opportunity to thank the staff, management and Board for their support and dedication during the period under review.

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LOOKING AHEAD

As a Group, we believe in setting and achieving challenging targets. For 2006, our strategic priorities include:
• Continue to identify and pursue value-enhancing expansion opportunities to consolidate our position and diversify earnings;
• Improve operational cost efficiency and expand margins to take full advantage of scale across all our operations;
• Manage ambitious network roll-out in Iran; and
• Increase capacity through the management philosophy of “Just-in-time”.

Phuthuma Nhleko signature

Phuthuma Nhleko
Group Chief Executive Officer
22 March 2006

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