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.