9Mobile’s “Hidden Things” and Zero Returns for Spectrum Wireless

The Guardian has a nice piece where it chronicled the evolution of 9Mobile including a prediction that Teleology Holdings, promoted by pioneer MTN Nigeria boss (Adrian Wood), is likely to take over 9Mobile. The company had submitted a bid of more than $500 million, at least $200 million, ahead of Smile Communications, the second highest bidder. Others like Globacom and Helios did not bother to submit any financial bid after their successful technical bids. Airtel had already noted that they saw many “hidden things” which were not revealed initially.

Bharti Airtel later came out to claim that too many “hidden things” were not revealed about the health of the troubled telecommunications company.Indeed, in the process leading to the final round of bidding, one of the shareholders in Etisalat, Spectrum Wireless, came out to demand for its return on investment, claiming that after investing about $35 million in the telecommunications firm, it was yet to get any return. The firm went to the court and gots an injuction quashing the CBN-led interim board. A Federal High Court, Lagos had on January 12 nullified the appointment of the interim board for 9Mobile. Justice Ibrahim Buba made the order based on an application by Spectrum Wireless Communication Ltd, which invested $35million in EMTS/Etisalat in 2009.

The report notes that Barclays Africa is now waiting for Teleology to back its bid with cash. So, if all goes according to plan, Teleology would take over 9Mobile for about $500 million. I am not sure how that amount would keep the cash-challenged telco operating; it has debts obligations with banks in the neighborhood of $600 million. Sure, it is possible there would be an equity play, with the banks keeping some equities besides the cash. In other words, even if Teleology wires the $500 million, the debts cannot be fully retired [yes, more than $500 million is unbounded; but we would work with $500 million]. Indeed, there are many things we do not know, and some options may not really make sense. Any buyer must still invest money to deepen the competitive capabilities of the fourth-largest mobile network operator, at least to keep its 17 million customers, and hold its 12% market share.

Zero Value for $35 Million Investment since 2009

Spectrum Wireless had gone to court, claiming that 9Mobile had misrepresented facts in the constitution of the new board. The court ruled in its favor.

“The motion for stay is struck out having set aside the order. The respondent shall reverse all steps taken by it since the order was a nullity,”? the ruled.The order nullified the appointment of Dr. Joseph Nnana of the Central Bank of Nigeria (CBN) as chairman, Boye Olusanya as managing director, Mrs. Funke Ighodaro as chief financial officer, Seyi Bickersthet and Ken Igbokwe as members of the board of EMTS.

The key thing is that since Spectrum invested $35 million, it had not received any value. In other words, no dividend has been paid by the old Etisalat Nigeria or the new 9Mobile. Unless the company reinvested its profit, the implication is that 9Mobile (or old Etisalat NG) had not made any profit. Without profit, there would not be any dividend.

The Fourth Player

If they sell 9Mobile for $500 million, the Mubadala Development Company of the United Arab Emirates, the former largest shareholder, could justify its decision to write-off Etisalat Nigeria now. In other words, if the telco owned around $600 million, which it is required to pay, this new amount solidifies that decision to walk out. 9Mobile just lost at least $100 million of its value (based on the minimum outstanding debts), and if Mubadala Development Company had injected the new funds, this market-driven pricing efficiency would have been masked.

It is going to be extremely hard for any player that picks up this entity that is not Glo, Airtel or MTN. Being #4 in any wireless market is challenging. Number 4s rarely make money because the larger ones usually use scale to offer discounts which cripple the smaller players. I had expected an existing operating telco to take over. But it seems they developed cold feet when they saw 9Mobile books, as Airtel noted.

Finally, this game may just be starting. If the court follows through for Spectrum, this episode would have to be restated because even the Board in the eyes of the court was constituted illegally. Yes, as the court ruled, “[t]he respondent shall reverse all steps taken by it since the order was a nullity,” you can count that nothing has happened. Teleology would be extremely careless to wire funds for 9Mobile under that uncertainty. But if all holds, the winner here is Teleology because I see flipping as most markets rarely accommodate profitable #4 wireless operators.

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