Explaining the Etisalat N-exit (Beginners Finance)
During the second bid round for the GSM telecoms license, there was a new entrant “Alheri Telecoms” (Powered by Dangote).
Weeks easily became months with yet no service from Alheri. Then we got wind of Etisalat which purchased Alheri’s license while Alheri transformed to Dancom signing a notable MOU with PHCN on running about 14k kilometers of fibre to provide internet services. Reason for this; going by history, Alh Aliko Dangote does not get involved in any business long-term if he won’t be “Numero uno”. Talk about business philosophy!
Etisalat had quite a structure; Etisalat, EMTS…..more blah (*technicalities*)
People wonder why and how Etisalat couldn’t meet up loan repayments. Considering their data was so expensive and they captured a data hungry demographic of millennials due to their entry point to the industry and targeted ads. The market had been gobbled up by early entrants Econet, MTN and Globacom. At the time Etisalat arrived, those who needed mobile lines were new businesses, kids getting their first phones and those who were displeased with their service providers at the time. There were other reasons, but that isn’t the reason for this publication. Just note that Etisalat did not get their pick of choice prime customers. They were the bottom of the food chain so they had potential for better growth as they were connected to the feedmill of potential prime customers.
Let me explain my jibber-jabber of prime customers; the product on sale is communication technology network with a customized portal to relay voice communication, connection to the worldwide web, texts, VOIP, data storage via cloud, data retrieval…..etc. Majority of these products were useless to the unlettered as they only sought voice calls. More money was made from lettered people and even more from learned folks. Etisalats’ business model reflected that. Other service providers utilized more integrated models to their advantage as a result of their entry points into the industry.
I don’t have Etisalats’ books neither have I seen them (Fortunately, I’m not an EMTS shareholder), so I would build a simple model to how the exchange rate could have possibly killed them.
Picture this scenario; Company E (coy-E) a well-respected brand from the Middle East rolled out telecoms in Nigeria. There was promise of lean growth according to their top dollar consultants and they had the goodwill of respectable Nigerians of note who had assured them in not so many words that they would have a clean exit of their investments if they ever lost interest in the Nigeria market.
Let’s assume their financials indicated a breakeven at 400 customers billed at $100/monthly beyond which they would experience positive cashflow leading to profits. They hit breakeven in 4months with a proposed steady 20% growth for the next 3yrs (“fantasy/fa ta si”), thanks to the fact that they outsourced their marketing strategy to a top-notch big 4 consulting firm. Cashflow turned positive!
After year 1 audit, they reboot their strategy. They identify 400,000 premium customers who utilize services in the range of $400-$1000 quarterly whom they designate as anchor clients. They then roll-out freemium+premium services to get other customers to spend more utilizing their data market (total market share is 15million customers). At this point the cashflow is fantastic in relation to amount invested and industry returns and the exchange rate is 150naira=$1. At this, they are doing annual revenues of $400m.
Growth was steady and loans were serviced sufficiently. Then the opportunity to harness the future pops its unicorn-head. If they invested $2b, they could steadily absorb the growing population as other industry players were currently experiencing decline in growth. It was a $2b bet. They could prop up network capacity they required for their 15yr growth plan and the bright side to it was they could finance it by debt due to their clean books. Their current cashflow would absorb a $2b debt. They go shopping and get $1.2b locally while the balance comes from their foreign partners.
Fantastic right? The cherry on the pie is that their Nigerian chairman who is an ex banker negotiates a scintillating unprecedented moratorium which tickles the fury of other industry players (unfair advantage were it in a more formal economy).
Then the global commodities markets rattle developing economies. Nigeria is hit with a currency crisis that even Hollywood took notice and dedicated a minute to in the TV show Billions. Exchange rate goes from 150naira to the dollar to 450naira to the dollar. This statistically dilutes the value of coy-E cashflow in absolute dollar terms. They take a (66.7) % hit in dollar revenues, ceteris paribus.
Their cashflow goes from $400m to $133.4m with a steady decline in customer growth. Note that the growth was the basis for the loan. Also there is an obligor agreement available to all stating that the Gentlemen from the Middle East be the first to exit in a situation as this. By when the moratorium is to expire, pre-audit annual revenue is at $104m due to the recession, however there is now single digit growth.
The banks panic when they realize they would take a hit so they come together and form a cabal (FUGAZ….lol) fearing it would ruin them as the Crude oil business almost did a while ago. They know if they come together, the Central bank would direct them to make loan provisions, so the entire economy can absorb the shock. If this makes no sense to you, not to worry because it’s just how economies and institutions work. There is a socialist white flag raised by bankers when there is a financial crisis anywhere in the world.
So Etisalat had their promised exit, and the economy absorbed the loss.
Welcome 9mobile!
NB: There is nothing accurate about my figures. Im just a dude that loves finance.
