Vodacom put principle above profit when it announced its sudden withdrawal from the Nigeria cellular market this week, just two months after signing a management agreement with Econet Wireless Nigeria (EWN), which changed its name to Vee Networks in April.
Though the company says it found no evidence of corruption, serious corporate governance lapses prompted Vodacom CEO Alan Knott-Craig to urge his board to file for divorce in what must be one of the shortest betrothals in business history.
The fact that two of its major shareholders, Telkom and Vodafone, are listed on the New York Stock Exchange also appears to have weighed heavily on the board’s decision to quit Nigeria. Any evidence of impropriety could have serious consequences for both companies in the United States.
Knott-Craig said a relatively small group in Vee Networks had undermined Vodacom’s management from the outset. “When you start seeing your private business letters appearing in the Nigerian press, you get a sense that someone is working against you.”
What appears to have infuriated Vodacom was the payment of brokers’ fees for capital raised on behalf of EWN from three Nigerian states last year. Several of the brokers concerned also occupy positions on Vee’s board, creating a clear conflict of interest.
A due diligence exercise by Vodacom found no impropriety in the payment of brokerage fees for capital raising, but it demanded that any outstanding amounts owed to the brokers — roughly 50% of what was due — be withheld, or else it would have to conduct a further due diligence on these payments.
Vee’s board disregarded this agreement, rushing through payment of the outstanding brokerage a week before the agreement was signed by Vodacom. Vee was in a hurry to secure Vodacom’s signature by April 1 because it was obliged to surrender the EWN name and brand on that date.
ThisDay Nigeria reported this week that “brokerage or finder’s fees were paid to Oceanic Securities Limited, Bromley Asset Management Limited and Empee Ventures Limited, companies that had approached Lagos, Delta and Akwa Ibom state governments respectively and convinced them to make investments in the former EWN. The companies had demanded 10% of the investments made by the state governments.”
Oceanic Securities and Bromley were paid N$71,4-million each and Empee N$229-million.
Deputy CEO of Vodacom Andrew Mthembu, who was responsible for the Nigeria transaction, was fired this week, and group strategy director Robert Pasley resigned.
“Mthembu should have been far more careful in checking whether these payments had been made, and when they were discovered, he had to take the fall,” said one observer.
Some executives in Vee are apparently still loyal to Econet Wireless International (EWI), which previously ran EWN before being bounced out of the Nigerian market by Vodacom. EWI has several legal challenges under way in Nigeria, and is suing Vodacom for what it says was an inducement to breach of contract. This appears to have created some friction with Vodacom within Vee. EWI executives could not be reached for comment.
Vodacom’s entry to Nigeria would have secured it a hefty slice of a market, reckoned by London-based Pyramid Research to be worth 15-million subscribers within the next five years, versus a current market of about four million.
Pyramid has now downgraded its growth projections for the Nigerian cellular market to between 10-million and 12-million following the Vodacom pull-out.
“Vodacom’s entry to Nigeria was important to Vee Networks because of its financial muscle, and its ability to lower the cost of funding its network expansion,” said Pyramid’s Guy Zibi. “The second thing it brought to the deal was its experience in managing and operating large networks in Africa.”
Zibi said it was unlikely Vee would be able to find another partner of Vodacom’s stature. Orascon of Egypt was interested in doing a management deal with Vee, but balked when it came to putting money on the table.
“Vee can still go on to be a successful company, and there is a chance that EWI may be able to re-enter this market, but it won’t be able to bring the financial strength that Vodacom offered,” said Zibi.
Vodacom had been nibbling at the Nigerian market for more than a year, and originally planned to acquire a majority interest in EWN in a debt and equity package worth US$250-million. But when allegations of corruption started to surface, it opted for a five-year management contract in which EWN would adopt the Vodacom brand and hand over technical and financial management to Vodacom. Vodacom planned to invest US$500-million in infrastructure over the next few years.
Vee has about 1,1-million subscribers in Nigeria, versus MTN’s 1,6-million. Zibi said Vodacom’s pull-out meant MTN would overtake it as Africa’s biggest cellular operator in terms of revenue and profits within the next year.
MTN now has a relatively free run in Africa’s fastest-growing market. Knott-Craig said Vodacom had no intention of entering Nigeria via another route for the foreseeable future.
“Strategically, this is a set-back for Vodacom,” Zibi said.
Knott-Craig agreed, but said Africa was not short of growth opportunities to replace the maturing South African market.
“For a start, the South African market is not mature. Last year we had our fastest growth ever here. We think there’s another 10- or 12-million customers in this country, which is about double the current number. So there’s plenty of growth opportunities here, as well as in other Africa countries.”
Analysts awarded Vodacom high marks for its decisive and principled action. But its pull-out sends a disquieting signal to other businesses planning to enter the Nigerian market. This is particularly true of those with listed parents concerned about corporate governance lapses and the damage to reputation this could inflict on them elsewhere in the world.
But the biggest damage is to Nigeria’s efforts to shed its reputation for dodgy business dealings. Though Vodacom says corruption was not behind its decision to leave the country, it will leave many business people wondering whether Nigeria is worth the risk.