Implications of Eti­salat’s exit from Nige­ria

Eti­salat's de­par­ture from Nige­ria ap­pears on the sur­face to be a busi­ness in­vest­ment that went sour af­ter stake­hold­ers failed to reach an agree­ment. But the ef­fects of that mishap may haunt the Nige­rian mar­ket for years to come.

Financial Nigeria Magazine - - Contents - Chibuike Oguh is As­so­ciate Editor, Fron­tier Mar­kets, at Fi­nan­cial Nige­ria.

In one of the big­gest cor­po­rate up­heavals in Nige­rian his­tory, Abu Dhabi-based Eti­salat Group ex­ited the coun­try last month af­ter nearly ten years of try­ing to pro­mote a suc­cess­ful sub­sidiary in Africa's largest tele­coms mar­ket. The exit came af­ter Eti­salat failed to agree a debt re­struc­tur­ing deal with lead­ing Nige­rian banks, who had lent $1.2 bil­lion to its erst­while Nige­rian unit, Eti­salat Nige­ria, which is now called 9mo­bile.

Even though Eti­salat, and its part­ner, Mubadala, have re­lin­quished their Eti­salat Nige­ria shares and de­parted the shores of the coun­try, the con­se­quences of their exit will re­ver­ber­ate through­out the coun­try's tele­coms and bank­ing sec­tors in par­tic­u­lar, and the econ­omy in gen­eral, for a long-time.

How­ever, the cir­cum­stances of Eti­salat's exit is not with­out salu­tary ef­fects. With the in­ter­ven­tion of the Cen­tral Bank of Nige­ria (CBN) and Nige­rian Com­mu­ni­ca­tion Com­mis­sion (NCC), Eti­salat Nige­ria was saved an im­plo­sion, which could have arisen from its cred­i­tors seiz­ing the com­pany and sell­ing off its as­sets to re­cover their funds. This ac­tion was re­port­edly con­tem­plated in the course of the ne­go­ti­a­tions be­fore the reg­u­la­tory in­ter­ven­tion that fa­cil­i­tated the exit agree­ment. Sub­stan­tial job losses would have been the re­sult of seizure of the com­pany by its cred­i­tors.

More­over, the fa­cil­i­ta­tion of the agree­ment be­tween Eti­salat and its cred­i­tors is in line with the pol­icy stance of the Nige­rian govern­ment on sup­port­ing busi­nesses in the coun­try. In­ad­e­quate in­fras­truc­ture – and, in some cases, yawn­ing gaps in the reg­u­la­tory frame­works – have con­tin­ued to serve as a re­buke of the govern­ment in terms of en­ter­prise de­vel­op­ment in the coun­try. But the govern­ment, through the reg­u­la­tory agen­cies have con­tin­ued to sup­port busi­nesses. Through var­i­ous pol­icy in­stru­ments and di­rect fi­nanc­ing, govern­ment's sup­port cuts across busi­nesses con­sid­ered to be “too big to fail” and the SMEs.

Per­haps the big­gest fall­out of Eti­salat's de­par­ture from Nige­ria is that the exit has cre­ated a sig­nif­i­cant op­por­tu­nity for ma­jor tele­coms in­vestors seek­ing en­try into the coun­try's tele­coms mar­ket. Owing to its sheer size and rapid growth over the last two decade, Nige­ria's tele­coms sec­tor is re­puted as one of the most lu­cra­tive mar­kets in Africa. Yet, big tele­coms in­vestors have been wary of en­ter­ing the mar­ket be­cause of the pres­ence of dom­i­nant, deep-pock­eted ri­vals – MTN, Globa­com, and Bharti Air­tel – and the coun­try's dif­fi­cult op­er­at­ing en­vi­ron­ment.

With the exit of Eti­salat, how­ever, in­vestors now have a golden op­por­tu­nity to ac­quire an es­tab­lished op­er­a­tor in Nige­ria's ver­sa­tile tele­coms sec­tor. Reuters quoted Boye Olu­sanya, CEO of 9mo­bile – the suc­ces­sor com­pany to Eti­salat Nige­ria – as wel­com­ing in­vestor in­ter­ests in the com­pany. “Like any busi­ness we are al­ways avail­able for some­one with a good of­fer ... but we are pre­pared to man­age this busi­ness for the long haul," Olu­sanya said.

Con­fir­ma­tion of in­vestor in­ter­ests in 9mo­bile has come from God­win Eme­fiele, the CBN gov­er­nor. In the im­me­di­ate aftermath of Eti­salat's exit, he re­vealed that in­vestors have been jostling to ex­press in­ter­est in ac­quir­ing ma­jor­ity stake in 9mo­bile once the bid­ding pro­cesses be­gin.

The ra­tio­nale for the fever­ish in­vestor in­ter­est is ev­i­dent. 9mo­bile has 18.5 mil­lion sub­scribers and re­port­edly gen­er­ates about N20 bil­lion in rev­enue monthly, not­with­stand­ing the com­pany's strug­gle to pay its cred­i­tors.

Among the in­vestors re­port­edly gun­ning to ac­quire 9mo­bile is French tele­coms giant, Or­ange. Or­ange has been on an ac­qui­si­tion spree in Africa as part of a strat­egy to boost its rev­enue in or­der to off­set slug­gish rev­enue growth in Europe – the com­pany's home con­ti­nent. In less than four years, Or­ange has al­ready ex­panded its op­er­a­tions to over 20 African coun­tries, in­clud­ing Cameroon, Ivory Coast, Niger, Mali, Tu­nisia, Kenya and Egypt.

If Or­ange suc­ceeds in its quest to ac­quire 9mo­bile, the deal will ce­ment the Paris­based com­pany's po­si­tion on the con­ti­nent and sig­nif­i­cantly bol­ster its African op­er­a­tions. Or­ange's African rev­enue reached €5.2 bil­lion in 2016, ac­count­ing for 12 per­cent of the group's to­tal rev­enue. Or­ange man­age­ment un­der­stands that this rev­enue seg­ment will shoot up if it can make 9mo­bile its Nige­rian sub­sidiary.

How­ever, Eti­salat's exit from Nige­ria will also im­pact the bal­ance sheets of the 13 Nige­rian banks that par­tic­i­pated in the loan deal. Un­til 9mo­bile re­turns to prof­itabil­ity or starts mak­ing in­ter­est pay­ments on its loans, the banks will be re­quired to cat­e­go­rize the debt as non-per­form­ing, at least in the medium-term.

If this hap­pens, the non-per­form­ing loan-ra­tio in the bank­ing sec­tor will spike and prof­its will de­cline as pro­vi­sions are made to cover the bad debt. How­ever, the NPLs and pro­vi­sions are not ex­pected to be ex­or­bi­tant, given that 9mo­bile's loans rep­re­sent just 3.38 per­cent of the to­tal bank

loan book of N2.36 tril­lion at the end of 2016.

The Eti­salat de­ba­cle will fur­ther di­min­ish the ap­petite for for­eign cur­rency loans amongst banks for a long time. In the 2016 fi­nan­cial year, Nige­rian banks' NPLs spiked largely due to the im­pact of the de­val­u­a­tion of the naira. The banks had granted huge for­eign cur­rency loans to oil and gas com­pa­nies and other large cor­po­rates who couldn't meet re­pay­ment obli­ga­tions as Nige­ria suffers both quan­tity and price shocks in the oil mar­ket. With the ex­pected im­pair­ment of 9mo­bile's for­eign cur­rency debt in this fi­nan­cial year, banks are likely to be weary of grant­ing such types of fi­nanc­ing in the near term, not­with­stand­ing any im­prove­ment in the for­eign ex­change mar­ket.

For banks and tele­coms op­er­a­tors in Nige­ria, the reg­u­la­tory cli­mate is set to get tougher as a re­sult of Eti­salat's fail­ure. Al­though the CBN and NCC were in­stru­men­tal in stop­ping the Eti­salat dis­pute from es­ca­lat­ing into a full-blown cri­sis, the down­side of the in­ter­ven­tion is that the reg­u­la­tors will place op­er­a­tors un­der greater over­sight hence­forth. For in­stance, the NCC may ex­tend its reg­u­la­tory pow­ers to scru­ti­nize the fi­nances of large tele­coms op­er­a­tors in terms of their debt lev­els and long-term fi­nan­cial plans. The CBN may also ad­vise the banks to be more risk-con­scious to safe­guard de­pos­i­tor's funds and avert a sys­temic cri­sis. This ex­pan­sion of reg­u­la­tory over­sight will fur­ther erode what­ever lat­i­tude op­er­a­tors had hith­erto uti­lized to boost fi­nanc­ing, rev­enue and profit.

Given the ac­ri­mo­nious man­ner by which Eti­salat pulled out of the coun­try, Nige­ria may now find it dif­fi­cult to attract in­vest­ments from the Gulf states. With the re­cent slump in global oil prices, Mid­dle East­ern coun­tries, par­tic­u­larly UAE and Saudi Ara­bia, have ramped up in­vest­ments world­wide as part of ef­forts to di­ver­sify their oil-de­pen­dent economies. Saudi Ara­bia has launched a plan to add up to $2 tril­lion to the coun­try's sov­er­eign in­vest­ment fund in or­der to di­ver­sify govern­ment rev­enues through div­i­dends from in­vest­ments.

In the wake of the Eti­salat saga, Nige­ria may be over­looked as a pos­si­ble in­vest­ment des­ti­na­tion by some of these Gulf coun­tries, who work to­gether as mem­bers of the Gulf Co­op­er­a­tion Coun­cil. It cer­tainly doesn't help Nige­ria's case given that Eti­salat's ma­jor­ity share­holder is the UAE govern­ment and Mubadala, the erst­while se­cond part­ner in Eti­salat Nige­ria, is the sov­er­eign in­vest­ment arm of the Abu Dhabi emi­rate.

Ex­actly what caused Eti­salat's in­abil­ity to meet its loan obli­ga­tions was a muted pub­lic de­bate dur­ing the weeks of the dif­fi­cult ne­go­ti­a­tions. Eti­salat Nige­ria had in 2013 ob­tained a seven-year loan fa­cil­ity of $1.2 bil­lion from 13 lo­cal banks and their for­eign coun­ter­parts to re­fi­nance a $650 mil­lion loan as well as fund the ex­pan­sion of its net­work. The re­fi­nanc­ing al­ready in­di­cated Eti­salat was strug­gling with liq­uid­ity. Why the UAE group failed to in­ject new cap­i­tal in less-costly fi­nanc­ing sug­gested some dis­il­lu­sion­ment with the com­pany. This aloof­ness to the ser­vic­ing of the $1.2 bil­lion fa­cil­ity char­ac­terised the po­si­tion of the Eti­salat Group.

The un­der­cur­rent of this would be that Eti­salat Nige­ria was play­ing from a po­si­tion of weak­ness, com­pared with the other three mobile tele­coms giants, who com­mand sig­nif­i­cantly larger mar­ket shares. Eti­salat had wanted to use the num­ber porta­bil­ity pol­icy to win dis­sat­is­fied sub­scribers and in­crease its mar­ket share, but this didn't bridge the gap. This may be in­struc­tive for po­ten­tial in­vestors in 9mo­bile. Be­ing a back-bencher among the top four can be per­ilous.

It was sug­gested that Eti­salat Nige­ria might have been mis­gov­erned. Whether this is true or not, its board has been sacked. 9mo­bile now has a new board, rep­re­sent­ing the new stake­hold­ers.

Fi­nally, opin­ions were more uni­fied that Eti­salat Nige­ria would have suf­fered from the sharp de­pre­ci­a­tion in the ex­change rate since the loan was con­tracted in 2013. Be­tween 2013 and end of 2016, the naira had de­pre­ci­ated against the dol­lar by over 80 per­cent, while a de­bil­i­tat­ing dol­lar scarcity has be­dev­illed the forex mar­ket since oil prices slumped from its peak in 2014.

Eti­salat's de­par­ture from Nige­ria ap­pears on the sur­face to be a busi­ness in­vest­ment that went sour af­ter stake­hold­ers failed to reach an agree­ment. But on a closer look, the ef­fects of that mis­ad­ven­ture may haunt the Nige­rian mar­ket for years to come.

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