Osebumere Odia writes that the acrimonious battle over the acquisition of 9mobile is unnecessary as Teleology has been chosen the preferred bidder and has not yet defaulted on the terms of its selection
A casual observer of Nigeria's telecom industry may have been carried away a few months ago by news of supposed interest in acquiring 9mobile by hordes of corporations far and near. Several companies were said to have lined up for the bid including mobile network operators like Globacom and Airtel the broadband services provider, Smile Communications. Others were Helios, a private equity firm and Teleology a special purpose vehicle of telecom industry veterans. A good number of these companies made considerable effort at generating hype around their ambitions and the media was awash with claims and promises, not too dissimilar to those commonly associated with politicians. A particular bidder, days before the final bid even claimed that it had already won the bid, and that the forthcoming bid was merely a formality.
On the day of reckoning however, only two companies, Teleology and Smile Communications were able to accompany their bids with financial propositions. While Airtel and Helios backed out completely, Glo reportedly did not back-up its bid with a financial proposition. Feelers from Barclays Africa indicate that Teleology actually bid more than double the USD 300million which Smile Communications reportedly bid, which in addition to all of the technical and other assessments, qualified it for the preferred bidder position. Smile Communications automatically got the reserve bidder slot, a position which implied that in the event that Teleology defaulted in the discharging its financial obligations under the terms of the sale, the preferred bidder slot would automatically be transferred to Smile.
A condition for the transaction was upfront payment of a non-refundable fee of USD 50million within 21 working days of being appointed preferred bidder. Days before the deadline, Teleology paid the deposit and publicly announced its preparedness to execute a 10-point plan of action on taking over 9mobile. The industry is now literally waiting with baited breath to see if Teleology will discharge the second critical requirement of the deal, namely pay the bid amount within the specified period.
Should Teleology make good on its promise to pay up its bid price within the specified period, then the Nigerian telecom industry would have enjoyed a fortuitous shot in the arm. It may have been saved from a potentially turbulent situation which some analysts say could even have been a fore-runner to systemic distress in the sector.
This is particularly so as news emerging from the media indicates that the reserve bidder, Smile Communications appears to be contending with severe financial difficulties bordering on indebtedness. According to THISDAY newspaper (May 9, 2019), the company is reeling from the after effect of a default of a USD 125 million loan, sourced from Afrexim Bank and routed through Diamond Bank. The loan default, the newspaper says has put Diamond Bank in a fix as Smile Communications is currently unable to meet the conditions for its full disbursement. The result has been that the bank is now torn between withholding further disbursement of the loan (with the attendant worsening of Smile Communications' position) and disbursing the final tranches of the loan to Smile and worsening its bad loan exposure. Even though Smile Communications has curiously through its PR agency rather than its lawyers, put out a rather meek denial, the company may indeed be tottering on the brink of insolvency, according to industry analysts, especially judging from its stagnation - in terms of network coverage and active subscriber numbers - over the years
The recent reports of Smile's possible insolvency raise critical questions not only about the future of the company, but also about its reported bid for 9mobile. What was its exact objective for bidding to acquire 9mobile? If it is indebted to the tune of USD125m to Afrexim Bank/Diamond Bank, how did it intend to raise the USD 300million offer it made for 9mobile?
There are yet other questions. Smile Communications received its operating license from the NCC in 2009, but it took it all of five years to launch its 4G/LTE network. The network was launched in 2014. Since receiving its license in 2009 and launching five years later in 2014, however, Smile Communications has only been able to extend services to 8 cities: Lagos, Ibadan, Asaba, Onitsha, Benin, Port Harcourt, Abuja and Kaduna. It doesn't have a presence in any of the thousands of rural and semi-urban areas across the country, neither is it accessible in any of the motley highways across Nigeria.
According to current data released by the Nigerian Communications Commission, NCC, Smile Communications had a total of 78,808 subscribers as at end of March 2018.
By contrast 9mobile, which it had bid to acquire, had as at March 31, according to NCC's figures, more than 16million active subscribers. In addition, in contrast to Smile's 8-city coverage, 9mobile has coverage spanning the entire country - hundreds of cities, towns, villages, hamlets as well as roads and highways.
Was Smile seeking to transfer the experience garnered from managing its network in 8 cities and catering to a little under 80,000 subscribers to taking over a much larger network? Did it sufficiently analyze the scope of work which this portended? An analysis of an interview recently granted to THISDAY Newspaper by Mr. Ahmad Farroukh, Smile Communication's executive director, operations, hints that the organization may have been either naïve and simplistic in its evaluation of the prospects and challenges of the company it sought to acquire, or lacking in analytical proficiency.
In his interview with THISDAY's Emma Okonji, (THISDAY, March 10, 2018) Farroukh had claimed that "9mobile currently has 500 base transceiver stations (BTS) across the country, and by the time we add our 400 existing BTS and combine it with 600 BTS that we can provide within 90 days, 9mobile will be having approximately 1,500 BTS which will match the number of BTS that the largest telecoms operator in the country currently has." He added that "so should we acquire 9mobile, we will make it competitive from day one, with unprecedented speed of service delivery."
A simple analytic inquest could have questioned this assertion. How can 9mobile which boasts over 16 million active subscribers conceivably service such a massive customer base with a mere 500 base stations? Perhaps a more efficient due diligence regime could have helped to reveal to Farroukh that 9mobile operates in excess of 5,000 base transceiver stations. But even this number is a far cry from the number of operational base transceiver stations of the industry's biggest operator which is in the region of 15,000.
A critical review of the pedigree of Smile Communications, notably the small size of its operations reflected in its coverage (8 cities only) and its subscriber numbers (under 80,000 subscribers), the extent of its understanding of the scope of operations that are implied in managing a country-wide network of the scale of 9mobile coupled with its financial viability which according to THISDAY now borders on insolvency, raises serious questions about its bid for 9mobile. Was its bid a mere gimmick to draw attention to financiers and perhaps help it re-negotiate its financial position?
Smile Communications' current dire financial situation also calls to mind recent disclosures by the NCC about the level of financial stability of the overall telecom industry. According to the NCC, a good number of firms in the telecom industry may actually be struggling with financial viability.
The signs are indeed poignant. Current reports indicate that interconnect debt in the telecom industry is in the region of well over N30billion. Interconnect fees are monies that are paid between mobile network operators when calls are terminated on their networks from other networks. That such a huge debt is owed on interconnection alone is a huge red flag for the industry.
It is also clear that on account of the fallout of the financial challenges of recent years especially with regard to Nigeria's recent economic recession and the foreign exchange challenges that have dogged the economy, the telecom industry is hallmarked by diminishing CAPEX investments. In fact, according to the telecom industry consultancy, Xalam Analytics, CAPEX investments in Nigeria's telecom industry may have shrunk by as much as 40 percent in 2016 alone.
In addition, in real terms annual revenues in the industry are declining. While revenues may be growing in Naira terms, year-on-year, in dollar terms 2017 revenues are actually considerably lower than 2014 revenues. Xalam Analytics estimates the difference to be up to 40 percent.
This scenario is unfortunately worsened by the cut-throat competition in the industry which is aggressively whittling away at margins in the sector and making profitability harder to attain and sustain.
It is in the face of these and other considerations that analysts are in agreement that 9mobile's sale may indeed be a fortuitous intervention in Nigeria's near-beleaguered telecom industry. With existing mobile network operators severely hamstrung for capital in the face of the difficulties in the operating environment, the interests of Nigeria would be best served by the injection of fresh foreign capital into the industry. Incidentally, none of the established global telecom operators - Vodafone, Telefonica, Orange - appear to have much interest in Nigeria's telecom industry despite it being touted as the largest in Africa. The next best option for attracting fresh foreign capital, therefore, was for Nigeria to sell 9mobile to a Greenfield operator.
In this light, I had argued in op-eds published last January in THISDAY, TRIBUNE and BUSINESSDAY respectively, that it was in the best interests of Nigeria to sell 9mobile to a Greenfield operator rather than an existing operator.
Thankfully, Barclays Africa appeared to have heeded the call, even if not deliberately with its appointment of Teleology as preferred bidder in the circumstances. As stated earlier, none of the mobile network operators which had expressed interest prior to the 9mobile sale followed their interest through with financial proposals. This left the stage for two players only: Smile Communications whose heroic bid turned out to be considerably less than the bid made by the only Greenfield operator standing, Teleology.
With Teleology's prompt payment of its $50m non-refundable deposit ahead of the 21-working day deadline stipulated by the terms of 9mobile's sale, it would appear that the injection of fresh capital into the telecom industry may have begun in earnest.
Many analysts are of the view that this payment portends a good signal of seriousness by Teleology to fully consummate the 9mobile deal. Teleology in announcing its 10-point plan of action upon acquiring 9mobile, hinted of a partnership with Kenya's leading mobile network operator, Safaricom. Despite the more than 300-year cumulative telecom industry experience of the promoters of Teleology, apparently the organization is unwilling to leave any stone unturned in demonstrating its technical competence to take over 9mobile and aggressively lead it to the path of recovery.
A few roadblocks remain. Some erstwhile minority shareholders have since gone to court to challenge the 9mobile sale, claiming that their interests were not accommodated in by the decision and process of the sale. It is hoped that all of the stakeholders including the regulators, CBN and NCC would engage these investors and arrive at a mutually agreeable consensus in due course.
The CBN and the NCC have played the very enviable role of forestalling the job losses and potential systemic risk to the larger telecom industry that may have accompanied the foreclosure of 9mobile by the bank consortium to which it is indebted. The choice of Teleology, a Greenfield operator that may conceivably inject fresh foreign capital into the telecom industry is fortuitous and is clearly a needed tonic for Nigeria's struggling telecom industry.
Will Teleology live up to its billing as a savior of Nigeria's telecom industry? Time will tell.
Osebumere Odia, an economist and technopreneur, writes from Lagos