NIGERIA: NITEL PRIVATIZATION HITS DEAD-END AS IIL

UNCLAS SECTION 01 OF 03 ABUJA 001024

SIPDIS


DEPT PASS TO EXIM, OPIC
LONDON FOR AFRICA WATCHERS


E.O. 12958: N/A
TAGS: EFIN ECON BEXP ECPS EINV PGOV NI
SUBJECT: NIGERIA: NITEL PRIVATIZATION HITS DEAD-END AS IIL
FAILS TO MEET PAYMENT DEADLINE


REF: LAGOS 597



1. Summary: Investors International (London),Ltd. (IIL)
was unable to meet the GON deadline for its $1.185 billion
payment for NITEL. The GON must now decide what to do with
NITEL, IIL, and the privatization process. Of immediate issue
is whether the GON will refund IIL,s 10% deposit. Through
its loan to IIL for the purchase of NITEL, First Bank of
Nigeria is deeply exposed and may face financial losses;
however, FBN will no doubt weather the storm. The same
cannot be said about the GON privatization process and the
future of NITEL. End Summary.


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IIL Fails to Come Up with a Billion - Plus
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2. Investors International (London),Ltd. (IIL),the
preferred bidder for Nigeria Telecommunications Limited
(NITEL),failed to meet the March 26 deadline for payment of
the outstanding balance ($1.185 billion) to purchase 51
percent of NITEL. IIL had earlier deposited 10 percent of
the total bid price ($1.318 billion) as a non-refundable
earnest money deposit. This latest collapse follows IIL,s
inability to raise enough capital to meet an earlier February
deadline. At that time the Bureau for Public Enterprises
(the GON privatization agency) acceded to IIL,s request for
a six weeks extension to obtain the needed financing.
Initially, IIL had hoped to raise roughly half of the
financing from the international capital market. This did
not happen as investor interest abroad did not materialize.
Compounding this problem was the reported failure of the core
investors to come up with the approximately $500 million that
they had earlier promised. While the soft world telecom
market did not help IIL,s efforts, a perception that IIL
grossly overbid for NITEL essentially sealed their fate.


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Where Does BPE Go from Here?
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3. With the IIL purchase of NITEL in tatters, BPE is weighing
one or several possible options. However, the Presidency,
not the BPE, will ultimately decide the issue. The identified
options are:


-- To commence negotiations with Newtel, the third-ranked
bidder with an offer price of $1.02 billion. (The
second-ranked bidder, Telnet, has withdrawn its offer.)


-- To re-advertise the NITEL bid and start over.


-- To develop more efficient service and improve NITEL's
competitiveness by entering into a management contract with a
private telecommunications operator to manage a
government-owned NITEL. One possible partner mentioned was
Korea Telecom.


-- To sell 20 percent of the GON's 49 percent holdings on the
Nigerian Stock Exchange.



4. A secondary, but important, issue related to IIL's failed
bid is whether to refund IIL's 10 percent deposit of $131.7
million. According to the bid offer terms, the 10 percent
deposit is nonrefundable and the BPE has formally recommended
to the President that the deposit not be refunded. (If BPE
retains the IIL earnest money, BPE would cut its losses.) On
the other hand, the GON knows that harsh treatment of IIL
does its future privatization efforts no good. One
compromise the GON is weighing is to provide IIL a 5 percent
equity stake in NITEL as compensation for its lost deposit.
Such an offer might be unattractive to IIL, especially since
any future dividends from NITEL would be many years away.


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Does Earlier Treatment of CIL Come Back to Bite the GON?
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5. Ironically, any decision to be lenient with IIL calls into
question the GON,s earlier treatment of Communication
Investment Limited (CIL) during the 2001 GSM auction process.
Along with Econet and MTN, CIL had agreed to pay $285
million, the bid price, for a GSM license. However, the
license was promptly revoked when the group failed to meet
the strict deadline for deposit of the funds into the GON
account at Chase Manhattan Bank, New York. Despite extensive
and highly publicized efforts by CIL to get the GON to
reconsider what many felt was an unduly harsh application of
the auction payment rules, the Government (in the person of
Nigerian Communications Commission Vice Chairman Ernest
Ndukwe) refused to overrule the decision. That decision may
now come back to haunt the GON (which, some surmise, had its
own reasons for treating CIL so rigidly.)


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A Fine Mess for First Bank of Nigeria?
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6. Another critical issue to be considered is the potential
financial impact from the IIL debacle on First Bank of
Nigeria (FBN),Nigeria,s oldest and largest bank. No doubt
First Bank,s image will be bruised. FBN lent $96 million
(in dollars) to IIL for the down payment on the winning NITEL
bid, and broke numerous Central Bank of Nigeria (CBN) rules
to do so. First, the amount lent to IIL by FBN almost
doubled the CBN,s single obligor lending limit of 35 percent
-- and the CBN has already threatened First Bank with
sanctions for doing so. FBN also failed to report to CBN the
amount as a loan. But the terms of FBN,s role in the IIL
bid were never a secret and some people question why the CBN
waited until now to make a fuss. A more appropriate question
though is why did FBN so blatantly ignore the rules? One
speculative answer may be that the temptation to acquire
monopolistic leverage over Nigeria,s telecom sector was just
too much for Nigeria,s most market-focused, domineering bank
to pass up. But only FBN management knows the truth.



7. While First Bank,s image among those in the know has no
doubt been severely tarnished, the impact on Bank operations
may not be that great. First Bank Managing Director Bernard
Longe told Econcouns that he believed it is highly unlikely
the deposit will be forfeited (wishful thinking?). But any
write-off of the loan, in what Longe described as a worse
case scenario, could be easily spread over 2-3 years. FBN
would appear to be in a relatively good position to absorb
the loss, if necessary. Longe indicated that FBN,s profit
during the last nine months was N7 billion (about $60
million.) In recent weeks FBN,s stock price has remained
relatively stable and there is no evidence of distress caused
by panicky depositors. Smart investors in FBN probably
already had discounted the impact of the NITEL debacle on the
Bank,s share prices.



8. On the contrary, an unrelated development actually is
helping FBN. The CBN,s suspension last week of 21 commercial
banks from transacting foreign exchange under the Interbank
Foreign Exchange Market (IFEM) serves to encourage customers
seeking safety to retreat to First Bank, long considered the
bastion of safe banking in Nigeria. A banking crisis among
Nigeria,s weaker institutions actually is good for FBN.


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Privatization: This Is Not BPE's Finest Hour
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9. The collapse of IIL's bid represents a major setback to
the GON's privatization program and the prestige of the BPE.
Many observers had cited the NITEL sale as an important
success story for Nigeria ) a success story now beset by
controversy, certain complication and potential failure.
Never popular with Nieria's elites accustomed to making use
of the patronage possibilities offered by state-owned
enterprises, BPE now faces serious questions about its
handling of the NITEL privatization in public hearings by the
House of Representatives. These hearings might make
potential foreign investors even more wary of NITEL. The
pending decision on the disposal of the 10 percent down
payment might also have an impact on the future of the
privatization program. Notwithstanding CIL, investors might
lose interest in participating in Nigeria,s privatization
process if the investment risks are perceived as too great.



10. The effect of an eventual outright forfeiture of IIL's
deposit on Nigeria's financial sector is not likely to be as
severe as reported in the Nigerian press. Managing Director
Longe might not be so lucky. Despite whatever becomes of the
earnest money deposit and of First Bank's fate, other
Nigerian financial institutions will be shy to lend on any
future NITEL bid process and will participate reticently in
any large privatization purchase.



11. All agree NITEL was hugely overbid. In the domestic
market, the GON's move to license a second national carrier,
combined with the successful GSM licensing in 2001, continues
to reduce NITEL's prospective profitability. Moreover, the
NITEL privatization process, at the direction of President
Obasanjo, was implemented faster than many expected with
perhaps not enough due diligence on the financial standing of
the bidders. BPE did not provide IIL enough of a cushion,
less than three short months plus six weeks, to pull such a
huge financial deal. Finally, the recently announced
&separation8 between the IMF and the GON could not have
come at a worse time for the NITEL privatization. With world
telecom markets already suffering, investors in the telecom
industry will not view Nigeria as fertile ground in which to
plant their money.
Jeter