On October 20, Nigeria’s telecoms regulator, the Nigerian Communications Commission (NCC) fined mobile operator MTN $5.2bn for failure to disconnect inactive SIM cards. We say the NCC’s case is strong; the amount is preposterous, but this is about respect – and the impact of the fine will be far-reaching.
We have assessed this case in the context of our market outlook analysis for Nigeria. We make the following points.
1) The NCC’s case is strong
The NCC has made a strong case to justify the necessity of imposing an extraordi-nary fine on MTN Nigeria, as outlined here. It is perfectly understandable that MTN would get fined if it did not follow the rules, even more so for rules so intricately tied to Nigeria’s current security context. The fine is also the culmination a series of alleged offenses by the operator over the past few years. In a number of public statements, the NCC has asserted that MTN had committed a “a total of 28 infrac-tions” and “has always been flouting regulations”. For the regulator, this is thus a “final straw” decision against an alleged repeated offender.
2) The amount of the fine is preposterous – but it is the law
The amount of the fine levied against MTN is preposterous. The fine is based on a calculation of N200,000 (~$1000) per SIM card; it is about 20% larger than MTN Nigeria’s annual revenue, about 5 times the amount of cash the company has on hand, and about 40% of what we estimate as the company’s enterprise value. On a per subscription basis, the $1000 baseline for the fine is more than 10 times the annual ARPU for the average MTN customer, and 10 times the estimated annual customer lifetime value. For additional perspective, this is the largest fine ever levied against a telecoms operator – anywhere. And yet, it appears to be clearly rooted in law, with a baseline had been clearly communicated to all operators.
This leads to an inextricably tricky affair. The NCC now faces substantial popular pressure to apply the law to the letter. The new government which has made respect for the rule of law a major plank of its platform cannot afford to look weak – it also just happens to need the cash, with the decline in oil prices creating a hole in the budget. But the strict application of the law, in effect, leads to an absurd outcome, with implications potentially more devastating than a $5.2bn windfall.
3) This is about respect
This case is also (and perhaps primarily) about respect. Respect for the rule of law and re-spect for those with the responsibility of upholding it. MTN cuts an outsized position in the Nigerian market; it controls around 42% of the mobile subscription base, generates around 50% of mobile sector revenues and 60%-70% of sector operating profits. It is a large, domi-nant, and ostentatiously profitable company in a market in which most players are strug-gling to eke out a profit. Like all dominant players, it continuously straddles that very fine line between protecting its position and behaving anti-competitively, along with that ill-defined border between confidence and arrogance. And despite all its efforts, it is still broadly regarded as “foreign” in a country that like most, exudes national pride. The under-lying message in the NCC’s public statements is that whether justified or not, the regulator does not feel MTN has afforded its concerns the proper level of urgency and its staff the proper level of consideration over the years.
4) The Nigeria Side: A $5.2bn Precedent – and Increased Nigeria Risk
All the same, while forcing MTN Nigeria to pay off the equivalent of 25% of Nigeria’s 2015 budget may bring some short term satisfaction, Nigeria should be watchful of the side effects. We have three major concerns in this respect:
• The $5.2bn precedent: one of the biggest obstacles to telecoms sector growth in the Nigerian market is multiple taxation – the befuddling array of arbitrary, overlapping, unpredictable and quite often illegal taxes and fines levied on telecoms operators by government at federal, state and local level, for items ranging from length of tower masts to environmental “assessments”. At a time when most government institutions are feeling a cash crunch, the $5.2bn precedent may offer a “license to fine” that will lead to a ratcheting up of enforcement, taxes and fines across the country. Anyone who has long yearned for more legal structure in Nigeria can only applaud a serious emphasis on rule enforcement. But such emphasis, if not accompanied by strong curbs on the broader multiple taxation issue will have dreadful side effects.
• The notion that should MTN opt to exit Nigeria, it will be easily replaced is as misguided as it is popular. To be sure, the lure of the Nigerian market is such that there will always be candidates to take over in such a scenario. Leaving aside the direct (and in our view, disastrous) impact of an MTN exit, the challenge will be in finding the right candidate. Any purported MTN replacement will need to raise and spend around $4bn-$5bn over the five years to build up a 3G/4G network, along with potentially assuming a $5.1bn regulatory liability. At a time when telcos’ business models are being challenged to their core and global players are refocusing, we posit that there are few players with the requisite level of scale that would be willing and able to take this type of plunge to replace an otherwise credible African-bred player in the Nigerian market.
• Ultimately, the risk for Nigeria, in our view, lies in tilting already challenging economics so much as to make the investment case inconsequential. In a market suffering and buckling under the weight of a myriad of supply-side bottlenecks and desperate for regulatory action, one must hope that the new administration and the NCC will be as adept and as resolute at offering carrots as they are at wielding the big stick. For this is a market that is increasingly frail. Top line mobile sector revenue is on track to decline by at least 5%, margins are falling and on current trajec-tory, sector CapEx is on track to be cut by at least 40% this year. From making adequate 4G spectrum available to curbing multiple taxation and facilitating the availability of national and metro fiber capacity at competitive prices, there is a lot of work to do. The chances of Nigeria coming close to achieving its broadband plans and building a thriving digital economy will depend on the NCC being up to that task.
5) The MTN Side – This Will Hurt
• For MTN, this comes at a terrible time. As we have noted in a separate analysis, African mobile operators (even dominant ones, like MTN Nigeria) are in a difficult spot; their revenue outlook is darkening, under the combined effect of competition, OTTs, depreciating currencies and rising costs. There are bigger systemic challenges looming. We have entered the age of Google, mobility and cloud; value is shifting from the network to platforms not controlled by mobile operators, threatening the fundamental structure of the operator business model. These trends may not yet be obvious in Nigeria, but they are coming. Balancing these systemic issues with the need to spend billions of dollars in broadband network upgrades and 4G spectrum while dealing with prickly Nigerian authorities and assuaging investors that have gotten comfortable with 60% EBITDA margins is arguably as tough a challenge the company has ever had to face.
• The terms will dictate whether MTN can pay. Should the requirement for payment be immediate, this would challenge the ability of the company to continue as a go-ing concern. A long staggered payment period would be the most manageable, as the company would be able to pay off operating cash flows. For example, BP got to spread its payments for the Gulf of Mexico oil spill over 18 years. A short staggered payment period would be challenging – the company would likely have to raise a mix of equity and debt to pay up. Whatever the case, we fully anticipate a negative impact on capital expenditure over the medium term at least.
6) The Future: Turning MTN from “Foreign” to Nigerian – And Exit is an Option
• MTN’s immediate priority is getting this issue resolved in a manner that ratchets down the tension in its relationship with Nigerian authorities and preserves the long term viability of its operations. Assuming that is resolved, the company faces a long period of introspection in its broader approach to institutional relations and governance. Beyond this, we believe MTN will have to find a way to become “more Nigerian” if it is to stay in the country for the long term. The company continues to be considered as foreign, despite around 2200 local staff, Nigerian top manage-ment, around $15bn in direct investment over the past 15 years and a strong CSR program.
• The larger problem, in our view, is ownership structure. At least 80% of the business is South African-held, through MTN Group and Shanduka Investments. Whatever Nigerian ownership exists is through high net worth individuals and select institutions. For a large consumer goods company that generates more than half of industry profits, this feeds a level of antagonism that is just not sustainable over the long run. Much like Safaricom did in Kenya, MTN will have to share the wealth, so as to increase the sense of ownership of the company across Nigeria, blunt widespread antagonism towards it along with politicians willingness to go after it. For the same reasons, making the brand more Nigeria-centric should also be a strong consideration, though less important than the ownership structure.
• Exit is an option: an MTN exit from Nigeria is a worst case scenario. But assuming no flexibility by Nigerian authorities on the amount or payment terms, it is an option that must be on the table. It would not be easy to sell, given the contribution of Nigeria to MTN’s profits. And it’d not be easy to find a buyer at a preferred valuation level. But considering this option would have the merit of accelerating MTN’s strategic thinking in re-inventing itself in the age of Google – something it will have to do in any event.