THE PRESIDENCY
Bureau of Public Enterprises
11, Osun Crescent, Maitama District, Abuja, Nigeria
Telefax (234-9) 4138861
E-mail: janichebe@bpeng.org
Web Site: http://www.bpeng.org
NITEL PRIVATISATION – THE FACTS
Since the Bureau of Public Enterprises (BPE) concluded the negotiated sale of NITEL with the preferred investor, a consortium led by the Trans National Corporation of Nigeria Plc ‘Transcorp Consortium’ on 03 July 2006, there has been a tremendous amount of public commentary on this transaction. We at the BPE maintained a studied silence for two major reasons. First, it is only fair that Nigerians whose assets are being sold are allowed to ventilate, one way or the other. But more importantly, any unguided response from the BPE could frustrate the fundraising efforts of the investor. With the payment of the initial $500 million for a majority stake in the company, it is important that some of the issues raised in the past few months about this transaction are addressed.
1. THE PRIVATISATION PROCESS
The key goals of the NITEL transaction strategy were:
1. To attract a world-class strategic investor with a proven capacity to develop NITEL and its services in both Fixed and mobile telecommunications;
2. To maximize the transaction value for Nigerian people; and
3. To make the transaction a landmark in Nigeria’s efforts to modernize its economy and build an image of efficiency.
At the first attempt, Investors International Limited (IIL) emerged with a bid of $1.317 billion, which it was eventually unable to pay. A review of possible causes of the inconclusive transaction revealed factors that contributed to the above:
(a) Global downturn in Telecoms industry
(b) Financial weakness in several leading international telecoms operators due to over bidding for 3G licences
(c) Weak domestic investment environment – this administration’s economic reform initiatives were yet to kick off
(d) Lack of established benchmarks and precedents in terms of Nigerian telecoms investment; and
(e) New and uncertain regulatory environment. These factors all contributed to the absence of truly credible telecoms operator from getting involved in the bidding process at the time.
The failure of the first strategic investor sale led to the Management Contract with Pentascope. The management contract was subsequently terminated.
The third privatisation attempt saw the introduction of some novel processes including extensive due diligence using innovative methods. At the beginning of the third attempt, an analysis was done on the problems experienced with earlier attempts to determine what factors would be critical for the success of this attempt. The critical success factors were identified as follows:
a. A well prepared transaction structure that incorporates potential investors views
b. Clear and realistic timing
c. High quality documentation
d. NITEL valuation in line with both local and international benchmarks
e. A comprehensive marketing strategy to achieve maximum number of bidders
f. A clearly defined competitive and regulatory environment
g. Availability of high quality financial and operational data
h. A transparent process in line with international standards
i. Strengthening of pre-qualification criteria
In order to protect transparency and give bidders the comfort they needed to participate in the process and submit their best bids, we used objective selection criteria, namely:
1. A quantitative evaluation methodology for the technical bids
2. Bidders informed in advance of the evaluation criteria and to a certain extent of the evaluation methodology
3. The minimum technical score determined and announced to bidders
4. Only technical bids that pass the minimum score moved to the next stage
5. Financial bids opened in public
However the third attempt was not successful with Orascom Telecom of Egypt, the leading bidder in the process, offering only $256.53mm for 51% of NITEL – a bid which was duly rejected for not meeting the valuation benchmarks.
The difficulties encountered in the various phases of implementing the NITEL transaction programme and the emotional attachment Nigerians have towards NITEL compelled the BPE to review the previous strategies used in handling NITEL transaction. Our findings were that:
1. The previous strategies resulted in purely quantitative assessment processes after the pre-qualification of bidders without enough interaction with the bidders to address qualitative assessments issues that impact seriously on the process and value of the company – especially in light of the complex nature of NITEL’s operations where it has been extremely difficult to obtain accurate and reliable financial data; and
2. The level of the bid price itself, which was above the underlying value (in the first phase and below the reserve price in the second phase) made completion of the process difficult.
There was a need to consider other transparent options that will:
1. Give the Secretariat enough control mechanism of the process as to ascertain at each level of the programme the difficulties of the investor and how to quickly adjust through a response system that is efficient and result oriented;
2. Remove all the speculative tendencies and the attendant loss of interest;
3. Be expeditious, for time now is of essence;
4. Lead to greater degree of comfort for the Federal government with no possibility of default by the winning investor; and
5. Enable the maximisation of all benefits to the nation as key variables for the effective management of NITEL are exhaustively discussed through a vigorous interactive system.
These compelling reasons informed the secretariat’s new strategy. The Secretariat did not want this new phase to be another flash in the pan, but a real transaction that will lead to the early rehabilitation of Nitel for effective operations. This informed the adoption of a “willing buyer – willing seller” strategy that would enable the transfer of the company to a private sector operator within the shortest time possible.
Based on a very careful examination of the interests outlined above, the BPE selected the Transcorp Consortium as a serious investor with the requisite technical, financial and management capability to turnaround NITEL.
WHY NEGOTIATED SALE STRATEGY
As have explained severally, certain factors influenced the choice of a negotiated sales strategy, including three well known, previous attempts, namely:
Investors International London Limited (IILL) failed to make payments following a bid of $1.317 billion in 2001
Pentascope failed to meet contract obligations, resulting in cancellation of same by the Federal Government in 2004
Orascom Telecom’s bid of $256.53 million in 2005 was rejected by the Federal Government as unacceptable
The NCP reasoned that a fourth round of competitive bidding would likely take 12 months or longer during which time NITEL’s value would continue to decline as liabilities/debts increase, service/market share decrease, and investors grow cautious as the elections approach. Investor caution, in turn, will lead to less interest, less competition, and lower bid prices. Overall, these add up to a single, compelling reason for the conclusion of the sale sooner rather than later, and that was:
NITEL value declined as its financial condition continued to erode -- as seen in a summary of its liabilities, revenue, and market share:
First, NITEL was losing value daily as liabilities increased and revenue declined:
In 2003, for instance, NITEL liabilities amounted to N73.8B. In 2005, as of October, liabilities had increased to approximately N130B and growing
In 2002, NITEL’s mobile communications subsidiary, M-TEL, had an 11% market share.
In 2005, as of December, M-TEL’s market share had fallen to 5%.
Since NITEL’s fixed link is used by other providers, NITEL technological constraints compromise their reliability and inhibit roll out of new capacity and services.
Given BPE’s bargaining position regarding NITEL’s sale can only decline over time, it was better to close the transaction while it could still negotiate from a position of strength. The only question that remained: how quickly to close the deal and make that deal the best possible for Nigeria? Hence the negotiated sale, a commonly used process for many major transactions the world over, including telecommunications.
The negotiated sale method meets all BPE’s original transaction objectives based on the same criteria used to evaluate prospective investors during the competitive bidding phase: namely, 1) to attract a world class strategic investor with a proven capacity in both fixed and mobile communications; 2) to maximize the transaction value, and 3) to reverse those telecommunications constraints impeding Nigeria’s economic growth.
While different from the competitive bidding process, it is important for all Nigerians to understand that a negotiated sale is a process, and it is competitive: it simply works differently, and was definitely to Nigeria’s advantage.
The negotiated sale proceeds through a series of steps. While the process extended to the preferred investor the ‘right of first offer,’ it also gave BPE the ‘right of first refusal,’ meaning that BPE was not bound to accept the offer.
The negotiated sale to a preferred investor still preserves competition. A short list of qualified investors gave BPE an ‘upper hand’ if the negotiation ‘breaks down.’ BPE would then have invited investors from the short list to make counter offers. All the bidders on the short list had met the technical, managerial and financial criteria used to qualify bidders from the very beginning of the competitive bidding process.
EMERGENCE OF TRANSCORP CONSORTIUM
There were many reasons why the Consortium led by Transnational Corporation of Nigeria Plc emerged as the preferred investor for the negotiated sale process:
1. Nigerian led group representing aspirations of all Nigerians – shareholders range from leading local corporate and financial institutions as well as local individuals. In addition, its ownership will diversify significantly following listing on NSE at the end of 2006.
2. Transcorp Consortium’s leadership demonstrated proven track-record and corporate success across many areas of the Nigerian Economy – including the involvement in its membership of the three biggest banks in Nigeria namely UBA, First Bank, Zenith
3. Technical Services Agreement with British Telecommunications – one of the world’s leading provider of telecoms services (25 million fixed-line subscribers in the UK alone)
4. Negotiations being finalized for a strategic investment from Etisalat of UAE (Established in 1976 currently has 3 million subscribers) – this will further bolster financial capacity and technical know-how
5. Corporate Nigeria players able to bring to bear deep understanding and extensive experience in dealing with local corporate issues – critical for dealing with NITEL’s numerous financial, operational and labour issues
6. Good understanding of local environment will accelerate NITEL’s turnaround strategy
7. Credible Technical Plan (scored 80% by BNP Paribas of Paris)
8. Few remaining credible operators unable to proceed with transaction for various reasons
• Globacom: Regulatory issues arising as holder of SNO license
• Investcom: Acquired by MTN Group
• Celtel: Successfully concluded acquisition of Vee-Mobile stake
• Afro-Telecoms & FT Networks: Problems with Technical Partners
9. NCC approval obtained
TRANSCORP’S FINANCIAL OFFER
Transcorp Consortium on Monday July 3 2006 offered $750mm for 75% of NITEL’s shares – this implies a valuation for 100% of NITEL’s equity at $1 billion. We can confidently say that this was an extremely good offer – especially in light of the 2005 valuation range, by our consultant, of $555m - $855m and the 2006 valuation range of $339m- $704m for 100% of NITEL’s equity.
Given that the transaction structure had not changed significantly – most of the pre-existing and historical liabilities and debts will remain at NITEL with the exception of the human resources related costs such as payment of pension liabilities and severance costs, estimated at $600mm, which are partly being settled by the sale of NITEL’s non-core real estate assets which have already been excised. The NITEL valuation was carried out by BNP Paribas of France – one of the world’s leading financial experts in the field of telecommunications privatisation and valuation.
Contrary to what many people outside of the telecommunications and financial services industry believe, the value of a telecoms business is not strictly based on the amount of money invested in the business, its size and scale of network infrastructure, its holdings of real estates or its status as an incumbent national carrier.
In any case, most of NITEL’s real Estate have already been transferred to the Pension Fund and were not included in the transaction. The value of any business is based on its ability to generate cash and profits – investors invest in an asset not for the sake of holding that asset but from the streams of cash that he or she intends to generate by successfully employing or deploying those assets. An asset in itself is just that – an asset.
TRANSCORP’S FINANCIAL OFFER VIS-À-VIS OTHER HISTORICAL OFFERS
Obviously, Orascom’s offer of $256.53mm was way below even the lower end of the 2005 valuation scale and clearly justifiably rejected.
BNP Paribas updated the 2005 valuation, reflecting the diminished financial outlook of the Company to give revised valuation parameters for NITEL in 2006.
From this analysis the implied valuation by Transcorp Consortium of $1billion for 100% is greater than the upper limit of $704mm established by BNP Paribas using revised 2006 financial projections and conservatively applying the 2005 adjustments for net debt.
Considerable amount of expertise and diligence was put into developing the valuation models by our financial advisors BNP Paribas of France in order to accurately determine a range of reserve price values for both the 2005 and 2006 NITEL transactions.
It has been clearly established that the implied valuation for NITEL of $1bn – derived from the Transcorp Consortium’s offer of $750mm for 75% - was extremely attractive and should be seen in context of what obtains. Many people refer to the IILL offer of $1.317bn for 51% made in 2001 and attempt to portray it as a benchmark. The IILL offer was only that – “an offer”. If it was realistic or truly represented an attractive financial proposition, they would have been able to finance it..
The offer was unrealistic and that is the key reason they were unable to complete the transaction – no investor was confident of the ability to generate a return on that over-priced investment. In the financial and business worlds, an offer can never be considered a benchmark unless it is backed by purchasing power – it cannot be classed as a benchmark unless someone is willing and able to pay for it.
In addition, NITEL in 2006 is not the NITEL of 2001. In 2001, NITEL was a near monopoly player with approximately 100% market share in the fixed and mobile telephony markets. Today, NITEL and MTEL have seen their market share savaged by competition from the numerous PTOs and GSM operators. NITEL that posted a net profit of N8bn in 2002 posted a loss of N22.2bn at the end of 2004 whilst watching its market share of the fixed line segment slide to approximately 49%.
It is pertinent to note that there are now 21 Fixed line PTOs and three other GSM operators each aggressively competing with NITEL and MTEL. The Companies’ performance have been further hampered by poor managerial and internal controls leading to critical failures such as the inability to complete revenue generating projects on time and, equally important, the inability to accurately assess and collect its revenues. Such failings, which have been compounded by legacy issues such as NITEL’s bloated workforce, has led to a situation were NITEL has for some time this year not been able to pay its staff.
CONCLUSIONS
It must be restated that the privatization of NITEL has been protracted with three failed efforts in 2001, 2003 and 2005. Over this period, the condition of the enterprise deteriorated, the value diminished and its liabilities remained a burden to the national treasury
A painstaking analysis informed the imperative of a change in strategy from the prolonged process of the three failed efforts, to a Negotiated Sale – which strategy is also provided in the 1999 privatization and commercialization act. And there was no guarantee that another prolonged sale process would achieve the desired result
Yet, the implementation of the Negotiated Sale that resulted in TRANSCORP CONSORTIUM emerging the preferred investor with an offer of US$ 750 million for 75 per cent of NITEL, was open, transparent and followed due process. Beside the acceptable offer price, TRANSCORP CONSORTIUM was declared the preferred investor on account of its membership comprising British Telecomm (as technical partner); Etisalat (of Abu Dhabi and holders of Thuraya Satellite Phone patent) and Transnational Corporation (of Nigeria, whose shareholders include the four biggest banks in the country) as equity shareholders.
Whilst an extension for the balance of the first tranche of payment, after 10% was paid within the designated period, was granted to the Consortium to complete the first tranche of payment, this was done within the stipulated time-frame normally expected for a transaction of this scale and magnitude.
This extension for payment has been granted to several investors in the past, including African Properties Limited in its 2002 bid for Hilton, Indorama in its 2005 bid for EPCL and IILL in its 2001 bid for NITEL, and is not unusual especially if sales consideration runs into the tens of millions in US Dollars.
Transcorp Consortium’s post acquisition plan which includes investing US$I billion in the next two years to increase the capacity of NITEL, should lead to the revamping of the enterprise, and improve telecomm services across the country, expand the tax base, result in job creation, all to the benefit of the Nigerian economy and the Nigerian people. Contrary to what has been alluded to in some quarters, the sale of NITEL to the Transcorp Consortium did not occur with any special favors attached. In fact:
A Negotiated sale is identical to a regular core investor sale process: only difference is one carefully selected preferred bidder vs. a handful of bidders
Sale Terms and Conditions offered to Transcorp similar to those offered in previous sale attempts
Transcorp Consortium required to meet all pre-qualification criteria earlier set to ensure technical and financial capabilities
Transcorp required to offer above the reserve price – this was achieved significantly with offer from Transcorp Consortium giving implied valuation of $1.0bn for 100%
Transaction fully transparent – both press and bidders fully informed of transaction procedures and processes
Reserve bench of 5 bidders kept in the event that Transcorp unable to meet the reserve price or reach commercial agreement on terms – most of the reserve bidders pulled out for one reason or another further buttressing rationale for negotiated sale
Transcorp technical and financial offer heavily scrutinised and recommended by our financial advisors, BNP Paribas of France (one of the World leading experts in Telecoms privatisation)
Chigbo Anichebe
Head, Public Communications
September 29, 2006
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