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Asset Valuation, Transcorp and the Reprivatization of NITEL (II)

By A. Eze Nwagbaraji

The Problem with Transcorp Transnational Corporation of Nigeria (Transcorp) as a business concept was defective from the outset. The intent of the founders and originators may have been genuine and plausible; the idea lacked vision and definitive operational business strategy. In due time, Transcorp became a business extension of its founders political interests. From its conception in 2004 as a business conglomerate with origins in Nigeria, the corporation was mired in ethical problems.

The idea of a Nigerian corporation that is an African conglomerate to the world is ideal, but Transcorp lacked core businesses. Nigeria and West Africa has some of the most technically skilled work force that will benefit a conglomerate, if properly harnessed, however the problem with the Transcorp brand remain the belief that a conglomerate can emerge from the top down. It acquired with government help a fraction of Hilton Hotels, Abuja, but never understood that replicating the hotel under different brand names across major cities in Nigeria would have been beneficial to its shareholders. You may franchise or co-own  the Hilton name, the chain, founded by the American, Conrad Hilton, does not give away its brand and is only interested in how much its co-owners or franchisees can contribute to the Hilton fortune. When Transcorp acquired rights to oil wells in Nigeria, it lacked the know how to exploit the business advantages of such assets.

General Electric (NYSE:GE), a North American conglomerate which Transcorp aspired to imitate, perfected its market positions as a conglomerate mainly through generic growth and good understanding of regional and global economic trends. GE over the past quarter of a century also doubled as the one corporation where other corporations that needed to attract the best talents go to seek out the best brains. For example, CEO (Chief Executive Officer) successions at GE are always planned over a protracted period and several executives of the corporation are prepped to succeed an incumbent. Those who did not succeed a departing CEO usually end up as leaders of other major American corporations. GE pooled the enormous American technical skills in machine tooling, design, mechanics, etc. hence it is one of the best brand manufacturers of air craft engines, refrigerators, air conditioners, etc. Whenever GE makes an acquisition of an existing corporation, it is to complement what it has already begun, not to go into a new line of business.

If Transcorp had gone into Aba, Jos, Nnewi, Owerri, Lagos, and other parts of Nigeria, it would have found sufficient talents to pool any aspiring conglomerate together and create the largest consumer driven corporation on the African continent.

Beyond the more than N22 billion the corporation raised when it came to the equity markets in 2006, Transcorp backers infused at different times, enormous amounts of funds into the corporation. When it acquired majority stake in NITEL, it had one of the most lucrative telecommunication assets on the African continent. However, it allowed the telecommunication assets to diminish in value and the revocation of its acquisition by the NCP, June 1, 2009 creates a myriad of problems within the Nigerian business and regulatory environment.

NITEL & the Nigerian Telecommunications Market

The Nigerian telecommunications market is dominated by foreign companies. Of the seven top GSM and CDMA cellular carriers in the country – (MTN, Glo Mobile, Zain, Starcomms, Mtel, Etisalat, and Multilinks), only MTN has a reasonable showing as a global carrier of telecommunication services and more than a quarter of its 100 million global customer base are Nigerians. Contrast this with China Mobile’s 471 million customers, Vodafone’s 275 million, Telefonica Movistar 262 million, or America Movil’s 190 million. Mtel, a subsidiary of NITEL is the only indigenous wireless phone carrier among the operators in Nigeria and its market share of the Nigerian telecommunications market is three percent.

Nigerians pay some of the highest telecommunication rates in the world, though the reasons for this include the gross inefficiency inherent in the energy and power systems in the country. Nearly 30 percent of the operating costs of a telecommunication company in Nigeria go into power generation. The other contributor to the high rates is the failure of NITEL to maintain its land line and wireless outfits that Nigerians had invested in over the past four decades. This failure reduced options available to market consumers to only wireless communications, while other societies with vibrant land line communication networks enjoyed reduced rates caused by competition provided to the wireless carriers.

The NCP’s revocation of Transcorp’s license and ownership of NITEL has both market and legal consequences and may not be the most optimal decision available to a regulatory agency. Telecommunication businesses are driven by technology and there is a global convergence in the provision of services.

The sale of NITEL to Transcorp through Nigeria’s privatization doctrines was an absolute transfer of public wealth into private hands (Transcorp). While Nigeria, through the NCP and the BPE retained regulatory and oversight rights post sale, due to the nature of the transaction, the ownership transfer, as a business transaction was absolute. Transcorp shareholders in consideration for the acquisition paid $500 million and the corporation has changed its positions and created expectations amongst its shareholders and in the market place. More than 24 months has lapsed since the sale was concluded.

The key legal question for the NCP, the BPE, and other market regulatory authorities in Nigeria remain when did they find out that Transcorp was incapable of meeting their expectations in the privatized NITEL. Private actors come to the market to seek profit. That is the only reasons for running or acquiring any company. It is the responsibility of regulators to engage private market participants and protect the common good.

The inability or refusal of Transcorp to inject more funds into NITEL may be a business decision. It does not affect its rights as the owner of NITEL. There are several legal options available to both the NCP and BPE. If NITEL had breached the contract of sale, these agencies should have acted quickly and challenged the consummation of the sale. As minority owners of NITEL who believe that the majority stake holders have reneged in their fiduciary responsibilities to the shareholders, legal actions demanding accounting would have been market friendly. Regulators and minority shareholders have the power to force Transcorp into bankruptcy and under Nigeria’s bankruptcy laws a trustee will re-arrange the corporate entity and provide more effective operation of the business, and where not possible, liquidate the corporation.

Within bankruptcy, all parties of interest in Transcorp, not only the NCP and the BPE would have had the opportunity to make their case. It is questionable whether NITEL will ever be valued at the rate which Transcorp acquired the assets.

National, regional, and international markets are driven by investor confidence in the fairness and readiness of regulatory authorities to be neutral umpires. Revocation of contract rights without sound legal reasoning have adverse effects on market participants and their willingness to trust the market. The NCP and BPE would have stood on the best legal ground if they had challenged Transcorp in court and allowed a judge in a competent jurisdiction to decide the faith of the acquisition of NITEL.

Resuscitating a Moribund NITEL

The Technical Committee or Board being empanelled by the NCP to handle the affairs of the now re-acquired NITEL should be given the power to turn the corporation into a functional telecommunication asset. The corporation is the most valuable telecommunication asset in Nigeria.

Privatization of public corporations is borne out of the economic rationale that private operators are better at handling businesses and delivering services. Hence to privatize implied unbundling the potentials and obtaining the real value of publicly run enterprises. However, NITEL as it stands is a diminished entity, in a fiercely competitive telecommunications market. Any attempt at selling the corporation as it is today and expecting maximum value from its sales is tantamount to asking a number one ranked heavy weight boxer to go into a boxing match with the number two ranked heavy weight boxer with one hand tied to his back. The number one heavyweight boxer will never agree to the deal.

The push to find another core investor that will acquire NITEL is also an outright admission that the government is grossly incompetent and incapable of shoring up NITEL. Potential acquirers of NITEL will rely on an independent appraisal of the corporation. The appraiser will look at the income stream within the corporation, the fierce competition in the local, regional, and global telecommunications markets. A corporate entity acquiring NITEL will adopt the most prudent analysis available in evaluating the decision to acquire a company that is a shell of its old self.

To create maximum value in the company, prudence requires that it be managed and turned into a viable business entity before any attempt at privatization. The core investor doctrine is increasingly becoming a questionable privatization mechanism. An entity as large as NITEL should be privatized in line with the best business practices. France Telecom and British Telecom are prime examples of such practices. A pool of private investors (corporations with experience in telecommunications) can be brought in to acquire some interests in a vibrant NITEL with the balance floated in the Nigerian stock exchange.

Alternatively, the NCP and BPE can approach leading telecom operators in Nigeria and work out a deal for collective ownership and management of NITEL in a trust. Telecommunication licenses are restricted licenses and their owners have a reciprocal responsibility to the common business interest. As collective trustees these companies are in a better position to appoint a management team, independent of their private interests. The management team will be laced with the responsibility of rebuilding the NITEL brand and making the entity a competitive market player. The added advantages include expansion of telecommunication services available to Nigerians, the emergence of an indigenous telecommunication company capable of competing in the global market, retention of market values during an eventual privatization, and unbundling into the market the various businesses within the NITEL Group.
The Transcorp/NITEL saga has presented our markets, the NCP, BPE, and other market regulators, the first real modern challenge. How the courts and all interested parties resolve these challenges will have far reaching consequences on market confidence.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.