Last June, Nigerian carrier Globacom revealed it had received a license from the government of Senegal; the announcement created much ado, for the license was awarded outside of traditional channels, with the country’s regulator ostensibly not aware of it. The process was certainly a step back for Senegal’s telecoms regulatory framework. As for Globacom, it’s another step in the company’s relentless effort to build a strong challenger to France Telecom in French-speaking West African markets.   

Over the past few years, Globacom has advanced meticulously, like a spider spinning its web. From its base in Nigeria, the company acquired licenses in Benin, Ghana, Cote-d’Ivoire and now Senegal. While the mobile portion of the licenses typically garners the most attention, it is mere pretense. In all these markets, Globacom would be the fourth mobile operator at best, with challenging profitability prospects. The value is elsewhere, rooted in the upcoming launch of Globacom’s Glo-1 submarine cable.

The licenses provide Globacom with more than landing points; they are a beachhead into West Africa’s burgeoning and underexploited wholesale market, a starting point to offering services in typically neglected landlocked West African countries. With its current coverage, Globacom will be in a position to challenge France Telecom and its primary West African vehicle, Sonatel, by selling bandwidth and corporate services into such markets as Mali, Burkina-Faso and Cote-d’Ivoire, and leveraging the volumes afforded by its Nigerian presence.

Globacom is too often under-estimated, primarily because  the company is information-shy and somewhat nebulous. It’s a mistake to do so; on evidence alone, we find Globacom’s strategic acumen to be as good as any; they know precisely what they are doing.

 South African fixed carrier Telkom announced in a preliminary statement that it expected EBITDA losses at its Nigerian unit, Multi-Links, to be higher than during last fiscal year (ending March 2009). The Company has announced impairments of ZAR 2.1bn (US$260m) on Multi-Links goodwill, and a full impairment of the unit’s net asset value. Last fiscal year, Multi-Links recorded losses of around $185m, off of a negative EBITDA of around $25m. This is clearly of utmost concern.

Telkom has now written off Multi-Links’s entire net asset value, a move that will raise further questions about its presence in Nigeria. We continue to believe that the company has some good assets in that market (though perhaps not that good since their assessed net value is now zero), notably in the wholesale and corporate segments. But competition in Nigeria has been tough. In the carrier’s carrier segment, Multi-Links has to contend with MTN Nigeria and a variety of other rivals, with competition putting downward pressure on bandwidth prices and Multi-Links still lacking nation-wide scale.

The consumer side has arguably been the biggest problem, as CDMA operators engaged in destructive price wars to win customers. Investors will be watching intently to hear which steps Telkom is looking to take in Nigeria, a Jekyll and Hyde market that has as much the capacity to pull up earnings as it does to destroy them. Without adequate strategy, Nigeria will be a money pit, one for which there are no easy solutions. One strategic option may be to get out of the consumer business altogether (or combine it with that of another CDMA player) and bulk up the carrier’s carrier side, or alternatively become more disciplined with subsidies, even at the cost of losing subscriber share.

On Tuesday 16, Nigeria’s National Council on Privatization announced that a Consortium known as New Generations Telecommunications had bid $2.5bn for a 75% stake in Nigeria’s state owned carrier NITEL. The winning consortium reportedly includes Minerva Group of Dubai, Nigeria’s Gicell (a small local wireless operator) and China Unicom (Hong-Kong). With all the due caveats for the finer details of the proposed transaction, the purported bid is puzzling and outlandish enough to strain credulity for an operation we had described as a “ghost ship”.  (Please click title to read full posting).

We make a number of points:

- The bid is $1.5bn higher than was offer by the next highest bidder (UK consortium Omen International), a rather unprecedented gap in absolute terms.

- The bid is $2bn higher than it was only three years ago (though for a higher stake), when Nigerian group Transcorp agreed to pay $500m for NITEL. Since that ill-fated bid, the company’s financial and strategic position has deteriorated, an evolution at odds with the valuation suggested by the winning bid.

- It is tough to identify the cash flows to would justify the bid. Under the most favorable of projections, NITEL’s mobile unit would be hard-pressed to generate such free cash flows.  Other segments have some upside, but are similarly a long shot to generate the underlying free cash flows that would be required to meet the valuation.

- No NITEL privatization is quite without controversy; two days after the initial announcement, a China Unicom spokesperson said the company was not involved in the bidding. A cascade of purported bidders has since denied they were involved.  

- The first test of bid credibility will come 10 days after it is officially accepted: the consortium will have to put up 30% of its bid, a substantial $750m.

Nigerian state telco NITEL is back on the sales block, in another government attempt to privatize the company. This time, the bidding process attracted 14 companies who have until February 15 to submit their technical and financial offers. (Please click title to read full posting).

The bidders include established Nigerian market players (Globacom, MTN Nigeria, Etisalat Nigeria) and outsiders (Brymedia West Africa, Finetek.com/Ericsson Consortium, Omen International (BVI), MTI Consortium, Telefonica Consortium, Conau, Dansacom Technologies, Adison Consulting, Foneama.com and Afzitelecoms). India’s MTNL entered the fray last week, in another sign of Indian companies’ rising interest in African assets.  

The main question is whether the Nigerian government can succeed in fetching a valuation above the US$980m it got from its most recent tender; that, we believe, is highly unlikely. 

NITEL’s is eerily suggestive of a ghost ship; old, creaky, sinister in its own way and aimlessly wandering about in the mist.  On the fixed side, NITEL has seen subscriptions plummet, from over 500k fixed subscribers in 2001 to around 60k active subscribers at YE2009 according to estimates from the Nigerian Communications Commission (NCC). The company has been irrelevant in a mobile market that has become the largest in Africa, with about 250k customers by the regulator’s count. NITEL has also been hit by multiple strikes over the past few years and its liabilities are abysmal. In October 2008, the National Council on Privatization estimated the company’s debt at a NGN200 billion (US$1.31bn).

 Where is the value then, one may be forgiven to ask? In some select assets.

• NITEL’s mobile assets, notably a GSM license acquired for US$285m in 2000; mobile subsidiary MTel runs a GSM 900/1800 MHz network, but its current state is anybody’s guess. Overall, MTel has invested a cumulative US$200m in its mobile network over the past decade. Overall however, the company’s mobile assets have lost substantial value, and its lost market share may be irrecoverable. The government has indicated that this asset could be sold on a stand-alone basis.
• NITEL’s transmission backbone, most notably its control on the SAT-3 submarine cable: NITEL invested around US$49m in SAT-3, which still provides most of the country’s international bandwidth. While the value of this asset is eroding, with at least two competing cables expected to become operational within the next two years, it remains attractive and may ironically carry higher intrinsic value than the mobile asset over the long term.

Taken together, these two assets could be worth between $400m and $600m (excluding the liabilities), certainly less than the Government of Nigeria (GON) will undoubtedly want for NITEL; this however, may be the GON’s last chance to sell for a somewhat respectable price before NITEL loses the last vestiges of its relevance.

As more governments move to mandate the registration of all active mobile subscriptions, concerns are rising over the impact of this new obligation on operator performance. Late last year, Vodacom indicated that South Africa’s implementation of the regulation mandating subscriber registration (known as RICA) had had a negative impact on its gross subscriber acquisition numbers. In early January, UBS removed MTN South Africa from its Top Telecoms List, amidst concerns that subscriber registration would lead to lower revenues and earnings in 2010. We believe this is an overreaction; we do not expect subscriber registration to have a materially negative impact on the earnings of African mobile operators, and see a more threatening cost impact in other factors. [Click title to read full analysis]

Subscriber registration is a painfully painstaking exercise. Logistical challenges abound, rural areas are difficult to cover, there is deep mistrust of government usage of the data, subscribers and operators just don’t like the process. But few would argue that it’s an unnecessary exercise, as a check against wanton, faceless crime. More African countries have moved ahead with plans, including Tanzania, Kenya, Botswana, Cameroon, and Ghana, and more are bound to follow.

Subscriber registration will have a negative impact, at least in the short term. This stands to reason, for registration introduces enough incremental friction into the subscription process to slash the volumes of spontaneous purchases. Subscriber registration will also likely lead to a drop in overall subscriber numbers as operators are forced to deactivate SIM cards that have not been identified. In one of the most prominent examples, Algeria compelled operators to deactivate close to 3m subscriptions in 2008; gross acquisition numbers subsequently dropped by about 50% year-on-year and the overall user base rose by a mere 3% (vs. 30% the previous year).

Overall however, we find the impact of SIM registration on operator earnings to be negligible at best in the long term (under the critical assumption that the process is not overly complicated), and at worst, a function of established gross additions and churn volume levels. The limited evidence available suggests that gross additions return to near pre-registration levels within 6 months to a year as subscribers learn to adjust to the new rules.  In Bangladesh, where the regulator deactivated 1m unaccounted lines in 2008, the impact on gross adds was marginal.

The argument for a materially negative impact on operator earnings is similarly unconvincing, in our view; in the case of Algeria and Bangladesh, operators experienced short term revenue blips (of one quarter or two) before revenue growth started anew, if from a slightly lower base.  To be sure, this is also a function of the level of penetration. The higher the penetration level, the less marginal revenue is a function of marginal subscriber additions. In Nigeria, for example, net additions are already in decline, and will likely be less than half 2008 levels, independent of any impact from SIM card registrations. Operators may still blame SIM registration, but we are not certain its impact will be any more prejudicial than a natural attrition in the number of acquisitions.

Further, we simply see bigger concerns to earnings elsewhere. The widespread decline in interconnect rates will have a more perceptible impact on earnings than SIM registration, as will across-the-board competition. Nonetheless, we believe first tier players that have moved fast enough to insulate themselves from the volatility of the voice business (as MTN has) are in a better position to withstand the one-time shock of SIM card registration.