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, Airtel
and 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
acquired 9mobile and that the forthcoming bid was a mere formality.
On the day of reckoning, however, only two companies,
Teleology and Smile Communications, were worthy of contention. While Airtel
backed down before the bid proper, Globacom and Helios did not back up their
respective bids with financial propositions. 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 forerunner
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, 2018), 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 through its PR agency, denied any loan default, 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 eight 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
several local newspapers by Mr. Ahmad Farroukh, Smile Communication’s executive
director, operations, hints that the organization may have been either naïve in
its evaluation of the prospects and challenges of the company it sought to
acquire, or lacking in analytical dexterity.
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 (eight 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 originated from other networks are terminated on their
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, from its 2014 levels.
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 and the
like – 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 several
newspapers, 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 by the decision and process of the sale. It is hoped that all
of the stakeholders including the regulators, Central Bank of Nigeria, 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 17 Adekanye
Street, Lawanson, Surulere. Lagos
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