The fortunes of Etisalat Nigeria after it defaulted on repayment of a $1.2bn loan raise questions on how a supposedly thriving company could have failed so spectacularly
The curious fall of Etisalat Nigeria
On the morning of 20 June the rumours were finally confirmed by a letter from the Etisalat Group of the United Arab Emirates, delivered to the Abu Dhabi Securities and Exchange Commission. The letter, signed by Chief financial officer Serkan Okandan, was in the usual dry, technocratic style of financial reporting: ‘Further to our announcement dated 12 February, 2017, Emirates Telecommunications Group Company PJSC, “Etisalat Group” would like to inform you […]’. But it contained an explosive announcement. A consortium of 13 Nigerian banks was taking over the Etisalat Group’s local affiliate in Nigeria, Emerging Markets Telecommunications Services (EMTS), which is known as Etisalat Nigeria, after it defaulted on a $1.2bn loan. It was the end of an extraordinary corporate journey which had begun a decade earlier when, in January 2007, the government of Nigeria awarded the Unified Access Service Licence to the Mubadala Development Company of Abu Dhabi (which owns Etisalat). Nigeria deregulated its telecoms industry in 2001.
RISE IN BAD LOANS
And it leaves more questions than it does answers. Many of them centre around the management of Etisalat Nigeria’s chairman, the influential Nigerian businessman Hakeem Belo-osagie. A former chairman of the United Bank for Africa, through his holding companies, Myacynth and Premium Telecommunications Holdings, Belo-osagie controlled a stake in Etisalat Nigeria, alongside the Gulf holding company. The primary question is: how come Etisalat Nigeria was struggling? The company was believed to have some of the highest margins in the industry, and had just two years before made $400m by selling towers to a local private equity company. Certainly, no one saw this coming, despite the recent economic pinch caused by the oil price drop. Nigerian banks have been forced to restructure their loans to businesses across various sectors, particularly energy, to forestall a sharper rise in the rate of bad loans. But little thought was given to the telecoms sector as the operators were believed to be capable of weathering the downturn. This was why the banks did not make any provision for the loan to Etisalat says Ugo Obi-chukwu, an accountant and financial analyst and founder of Nairametrics, a leading business news blog in Nigeria: no one anticipated that Etisalat would be unable to meet its obligation. “Typically banks will take provisions when they suspect that a borrower is going to default, but they didn’t take any provision [on Etisalat], none at all. So it was quite surprising”, says Obi-chukwu. Ironically, when Etisalat Nigeria launched in 2008, analysts were queuing up to predict its downfall. Its competitors – the likes of MTN, Airtel and Globacom – had been operating for a number of years before it came onto the scene. The market had effectively coalesced around these three operators, who had built out vast networks across the country and deployed various strategies to acquire and maintain a share of the market. It was thought that Etisalat had little chance of becoming a major player in the industry. But the experts turned out to be wrong. Etisalat performed remarkably well following its launch in October 2008, and went on to reach the milestone of 1 million subscribers just eight months later. Fuelled by the expertise of its foreign parent and the savvy of its chairman, Etisalat grew at rocket speed and soon became recognised as the operator with the best quality of service in Nigeria. Belo-osagie had recruited a stellar team led by Steven Evans, a former CEO of the UK’S BT Mobile.
Over the following years, as rival smaller operators folded Etisalat snapped up their subscribers. By 2011, the company had 12 million subscribers, cementing its status as the fourth largest operator.
As the landscape continued to shift under technological and operational pressures, Etisalat approached a consortium of banks in 2013 to grant it the $1.2bn loan to enable it refinance an existing obligation worth $650 million and fund an upgrade of its network. The loan was granted and the company carried on with its business having believed to have become profitable by then. But as the high cost of operations continued to exert pressure on their operations, Nigerian telecoms operators moved to cut costs and began selling their towers, which accounted for a high portion of their operating costs. Etisalat sold 2,691 towers to IHS Towers, a mobile telecommunications infrastructure company, in 2015. Reuters estimated the deal to have been worth $400 million, which is equivalent to what Mubadala had paid the Nigerian government for the licence. Then came the economic slowdown in Nigeria due to the collapse of oil prices in late 2014. The naira came under intense pressure as the country’s supply of foreign exchange declined sharply; this put a squeeze on the banking sector and led to a rise in the rate of bad loans. In response to this pressure on the currency, the Central Bank of Nigeria devalued the naira by around 50% in June 2016. This hit Etisalat’s loan obligation as it effectively meant a significant increase in the naira value of the loan. Despite attempted resolutions with the bank, ultimately the pace of repayments outstripped Etisalat Nigeria’s ability to pay – and the banks have ended up holding the company. Herbert Wigwe, CEO of Access Bank plc, one of the 13 lenders, asserts that the banks have no intention of running the company, but simply want to get back the funds they had lent, which were sourced from depositors’ funds. “We don’t want to be equity holders; we would rather be paid out,” Wigwe says.
WHO WILL BUY?
Given that the banks have assumed control of the company, the logical conclusion that would lead to the recovery of their funds would be to sell it to a buyer who would be interested in taking on the debt-laden asset. Wigwe implies that this is the likely course to be pursued by the banks, as the company remains an attractive proposition with over 20 million subscribers. “Would we be able to find a buyer for that kind of asset? The answer is absolutely yes,” he says. Nevertheless, the Central Bank of Nigeria has asked the banks to maintain the status quo and seek approval from it before taking any further action on the matter. This move is believed to stem from the view of the telecom regulator that the company is systemically important to the national economy. Finding a new buyer for Etisalat Nigeria will take a while, believes Obi-chukwu, because whoever now buys the asset will want answers to those questions about how the company went under. Some analysts believe Etisalat, which was thought to have the highest average revenue per user (ARPU) in the industry, should not have had such problems, implying the possibility of more signficant governance issues. Hence the ball is now in the court of the banks, the regulators and prospective owners to oversee the rise of a new operator from the ashes of the dead partnership. As for Mubadala and Belo-osagie, it seems their extraordinary journey has come to a sorry end. Charles Idem in Lagos
Etisalat staff in 2013 – bored, but blissfully unaware that the company had taken out a loan that would cause it to self-destruct