17 July 2006

Nigeria: Time to Let Nitel Go


Lagos — If the news making the rounds this weekend with regard to NITEL's privatisation is anything to go by, it will come as no surprise if pressure is mounted in the coming days to reverse the selection of Trans National Corporation (Transcorp) as the preferred bidder to acquire the telecommunications utility. In a nut shell, Transcorp which had been required by the Bureau of Public Enterprises (BPE) to pay $500 million by midnight last Thursday as part payment for NITEL only managed to make a deposit of 10 per cent of the $750 million offer price agreed to for the utility. But even before defaulting on the payment terms given by BPE, the sub-committee in the House of Representatives with oversight functions on NITEL had indicated its intention to investigate the sale of the company to Transcorp.

Typically, the Chairman of the sub-committee, Hon. Nasir Garba Dantiye, was of the opinion that the $750 million offered by Transcorp and its United Arab Emirates-based partner, Etisalat for 75 per cent of the equity stake in NITEL fell short of the value of the telecom firm. He also alleged NITEL was being offered at below its market value in order to fulfill the desires of a few government officials and their cronies in the private sector. Whilst agreeing that cronyism may have been a contributing factor in the emergence of Transcorp as the selected bidder, I will have to disagree with the sub-committee on its misconceived valuation of NITEL.

If truth be told, NITEL may not even be worth the $750 million that was offered by Transcorp. Only those afflicted with delusions of grandeur still believe the company is the market leader in the telecommunications sector in this country. The only dominance NITEL can comfortably lay claims to is in the area of transmission capacity. This ordinarily should give it first-mover advantage over other competitors, especially as demand for value added services, other than voice transmission grows. But if care is not taken NITEL shall soon be relegated to a distant second (or worse still to the market laggard) by Globacom, MTN and other national long distance operators that are either aggressively deploying multi-backbone transmission networks or have indicated plans to do so.

NITEL whether we like it or not has lost considerable value since 2001 when the Nigerian Communications Commission (NCC) held a licensing round for digital mobile operators in the country. The unsuccessful attempt to sell the company by the BPE shortly after the auction further served to weaken the enterprise which has lacked the wherewithal to compete effectively under a liberalized environment.

The company today is a shadow of its former self. It has an unhealthy balance sheet with a gapping hole which if discounted against its assets will not amount to much. A year ago NITEL owed a whopping N176 billion to banks and other financial institutions; suppliers; its staff as well as to the staff pension fund. The amount does not include another $23.8 million owed equipment vendors such as Ericsson, Siemens, Alcatel, Huawei, and ZTE. If 12 months ago NITEL had debt obligations this huge, one can only shudder at the magnitude its liabilities would have assumed today. Besides, it will be fool hardy for anyone to assume NITEL's real estate (or non-core assets) all over Nigeria can add significant value to the enterprise, as the sale of its properties are likely to attract the lowest possible offers from prospective buyers who will be acutely aware of the urgency by its owner to raise quick cash.

Added to that, the latest subscriber statistics churned out by NCC indicate that of the 1.4 million fixed phone line subscribers in Nigeria today, PTOs account for almost 950,000 or 68 per cent of the total market share while NITEL's mobile subsidiary, M-Tel accounts for 900,000 customers or less than 5 per cent of the 21.5 million mobile subscribers nationwide. In reality, M-Tel's subscriber numbers could even be lower due to an increase in the number of passive and disconnected subscribers on its network over the last few months.

Given the dire situation, the sub-committee of the House of Representatives and others with concerns over the sale of NITEL would be better advised to turn their attention on how to save the company and not how to lead it down the road to liquidation. Any attempt to hold an enquiry that can deter would be financiers from making available the funds needed to acquire the company will amount to sounding the death knell as it gasps for life.

Granted that the negotiated sale strategy adopted by the BPE to sell NITEL is a bit dodgy, but the strategy by its very nature is not transparent and is an option used by governments as a last resort to save a company from outright extinction. This is not the time to whip up unnecessary sentiments and insist on ascertaining right from wrong. Personally I do not care that much for Transcorp and have some concerns about its modus operandi. The prevailing circumstances, nonetheless, call for pragmatic decisions to be made and this is certainly one of those times.

It needs to be understood that under the deal struck with the BPE, Transcorp is expected to assume all of NITEL's commercial liabilities which still exceed N100 billion. Only the company's salary and pension obligation as well as gratuities and redundancy payments to be made to retiring staff and those that shall be laid off will be met by the Federal Government. Transcorp on the other hand, in addition to raising funds for NITEL's acquisition and settlement/restructuring of its debt obligations, will still need to inject a humongous amount of money to capitalise the firm.

Thus if Transcorp is the only company insane enough take on NITEL with its burgeoning liabilities then let it do so. I accept that from a strategic perspective NITEL can still be turned around due to the market opportunities that abound in a sector still underserved, achieving this feat however will be a tall order even for the most experienced and savviest of investors. Transcorp from my point of view hasn't quite grasped the enormity of the problems it is about to take on. This was glaringly apparent penultimate Monday when it ridiculously consented to BPE's stringent payment terms requiring it to raise $500 million in seven working days.

Even in the most mature markets, that amount could only have been raised in such short notice by a company awash with cash and not one aiming to finance its acquisition bid through a leveraged buyout. The National Council on Privatisation (NCP) hopefully shall give it a chance to redeem itself. Should the opportunity present itself, Transcorp must have the good sense to push for more realistic payment terms that will enable it pay for NITEL over a reasonable period and possibly in tranches.

A decision on the other hand, to restart the process of privatising NITEL would most certainly push the enterprise over the edge. Time and time again, the BPE has repeatedly failed to privatise the company through open and competitive tenders. It has also failed to attract the right caliber of investors to take over the enterprise in spite of the impressive growth recorded in the telecommunications sector in the last five years. Even foreign investors who once showed any inkling of interest in NITEL were either compelled to withdraw in the face of its massive debt overhang or made offers considered too low.

The only worthy competitor once capable of giving Transcorp a run for its money was Telkom South Africa. But for reasons I find difficult to accept the Federal Government has determined that it will not be in Nigeria's strategic interest to allow another South African firm ride rough shod in the telecommunications sector. That being the case, we have no choice other than to settle for an investor that is anything but perfect. Let's just hope this gamble pays off.

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