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Implications of Etisalat's exit from Nigeria 08 Aug 2017

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 Paris-based 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.

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