Nigeria’s MTN Group: Troubled, Yet Successful

The MTN Group came into Nigeria in 2001 at a time many foreign investors felt the country was too poor to be a viable market for a telecom company. South African based MTN Group at the time was one of the three non-indigenous companies that decided to take the plunge into a country that was emerging from 30 years of military dictatorship with an uncertain future.

It was a high risk decision, paying US$285 million for one of the four GSM licenses that was put on offer. But the decision has paid off handsomely and the MTN Group, through its Nigerian subsidiary, has become the poster boy of a highly successful foreign direct investor in Nigeria.

MTN Nigeria retail location

MTN Nigeria has grown fast to become the biggest player in the country’s telecom sector with a total of 52.3 million subscribers on its network, comprising 24% of its global subscriber base. With 36 percent of the subscriber base, it rakes in 57 percent of industry revenue. The company has laid 24,658 kilometers of fibre cables across the country, twice longer than any of its competitors and helping it facilitate fast internet access to millions of Nigerians. It now has 14.2 million active data users on its network and this is expanding by the day.

Over the past 17 years, the company has spent more than US$14 billion in capital expenditure expanding its business in the country and paid about US$2 billion in taxes to the government. But MTN has also made money in Nigeria. MTN Nigeria raked in revenues of US$1.5 billion in the first half of 2018 and looks on course to hit US$3 billion in revenues at the end of the year. MTN Nigeria, is in no doubt, a company with a very bright future in Nigeria but recent events now cloud that future and it is increasingly looking like what has been a great relationship with its host country, will end on a very sour note.

MTN troubles in Nigeria began in 2015 when the Nigerian Communications Commission (NCC) slammed it with a fine of UDS$5.6 billion for failing to disconnect unregistered SIMs on its network. It was a time that Nigeria was dealing with high incidences of kidnap and terrorism and the country compelled all telecom operators to ensure that only registered SIMs were used on their network.

This was to facilitate the easier tracking of criminals who use phones to contact their victim’s family or communicate among themselves. The NCC considered MTN’s non-disconnection of unregistered SIMs as a security issue and hit back hard at the company. The challenge was that the fine was more than twice MTN’s total revenues for that year. There was no way MTN would have paid such a fine and still remained in business.

MTN was left with no choice but to enter negotiations with the Nigerian authorities flying in Eric Holder, former US Attorney General and Head of Covington & Burling LLP, Washington D.C., to help lead the negotiations. The negotiations ended successfully with the fine being reduced to a more reasonable sum of about a billion dollars, which MTN was asked to pay over a 3-year period in quarterly installments. The company was also mandated to list its highly lucrative subsidiary on the Nigerian Stock Exchange (NSE).

Having already paid half of the 2015 negotiated fine and started the process of listing on the NSE, MTN thought it could now face its business expansion plans in a country it has remained very bullish on since 2001. But MTN is now faced with a new set of troubles, and significantly bigger ones.

The Payback

On August 29, the Central Bank of Nigeria (CBN) announced that MTN should return to the country some US$8.1 billion taken out as dividends due to allegedly improper documentation of Certificates of Capital Importation (CCI) issued for the repatriation of the dividends. CCI are certificates issued to all foreign investors as evidence of their having brought money into the country at the time they invested. It is issued by commercial banks which must register it with the CBN within 24 hours of issuance. Even though the CBN is not arguing that monies were not brought into the country, its position is that the basis for which CCI was issued for repatriation of dividends was faulty. Now it wants MTN to return all the dividends issued on the basis of the improperly issued CCI.

While this looks like a harmless request, there is a glaring issue here. The dividends were repatriated over a 10-year period. Since then, the naira has collapsed. The CBN is saying that the US$8.1 billion, assuming MTN was able to find and return it, will be at the exchange rates they were taken out. That could mean MTN booking up to half of the US$8.1 billion in exchange rate losses.

And while MTN was still trying to digest the CBN demand, its situation in Nigeria took another turn for the worse with a new demand of US$2 billion tax from the office of the Attorney General of the Federation and Minister of Justice. Interestingly, the tax demand did not come from the Federal Inland Revenue Service (FIRS), which is constitutionally charged to collect corporate taxes in the country. This has, with fair reason, raised doubts over the legality of the demand.

Nonetheless, MTN is now hooked on a potential liability of US$10.1 billion on its Nigerian subsidiary. Not surprisingly, the MTN Group share price has plunged by more than 30% on the Johannesburg Stock Exchange (JSE) as investors panic over its Nigerian troubles. MTN has since gone to court to challenge the action by the CBN and the Office of the Attorney General.

However, MTN’s troubles has raised concerns about the Nigerian investment environment. In the international investment community, there is now talk of the ‘Nigerian discount’ to reflect the uncertainty of operating in the Nigerian environment. The issue is not that companies are being fined. The issue is with the magnitude, which creates doubts about the intention and most significantly, the arbitrariness. An impression has also been created that MTN has become a target of the authorities because it is a non-Nigerian company that has become very successful in the country. Even if this perception is wrong, it is still not good for a country in dire need of attracting foreign investment.

In 2017, Nigeria managed to get slightly below a billion dollars in foreign direct investment, figures from the country’s National Bureau of Statistics (NBS) show. This compares to about US$3.5 billion that went to neighboring Ghana or the US$7 billion to Egypt. MTN’s troubles in the country will not aid the country’s quest for foreign capital. Sadly, buoyed by Chinese loans which has become the biggest source of infrastructure spending, the Nigerian government seems not to really care.

The post Nigeria’s MTN Group: Troubled, Yet Successful appeared first on Emerging Market Views.