NIGERIA'S VEE NETWORK: THE TRANSACTION THAT SUNK A DEAL AND COST TWO SENIOR PEOPLE THEIR JOBS
All over the world business gets very rough-and-tumble, especially at the point when the ownership of companies changes hands. In Africa this rough-and-tumble frequently occurs without reliable external referees like courts and with few regulatory "ground rules" limiting what might happen. But Africa's "freestyle" way of doing business came up against nervous developed world institutional investors, conscious of the cost of breaking the rules. In a surprise move this week the continent's largest mobile player Vodacom pulled out of its management contract with Nigeria's V-Network, a move that cost two of its most senior management their jobs. News Update seeks to put the spotlight on the transaction that caused the collapse of the deal.
Vodacom first intended to buy a majority stake in Econet Nigeria in a deal worth some USD150 million in equity and another USD100 million in operational loans but Econet Wireless International had contested the deal in the Nigerian High Court. It sued Vodacom for what it describes as "inducement to breach of contract". Vodacom subsequently signed a management contract with Econet Nigeria which changed its name to Vee Network and Vodacom appointed its own CEO to run it.
According to the Financial Times (London), Vodacom's surprise decision to pull out of Nigeria was due to a "breach of trust" between Africa's largest mobile phone operator and its Nigerian partner, Vodacom's Chief Executive Alan Knott-Craig said last week. "The decision to withdraw from Nigeria is a blow to our expansion plans, but there was a breach of trust and I decided we could not expose the company any further," Knott-Craig told the FT.
The alleged "breach of trust" centres on Vee's decision in March to approve payments totalling just under USD 3million to three brokerage companies. Vee directors held directorships in two of the companies. Vodacom had conducted extensive due diligence and found that earlier payments, which were negotiated in 2002, to brokers that had helped Vee raise capital from Nigerian state governments, were not illegal. However, Mr Knott-Craig said he specifically requested that no more money be paid out. On March 22, just over a week before the management agreement with Vodacom started, Oba Otudeko, Vee's chairman, approved the later payments, according to a letter Seen by the FT.
"We had a clear understanding, but Vee chose to pay without telling us," Mr Knott-Craig said. "When we discovered they had signed the management deal after making those payments, it was the trigger for us to leave Nigeria. We shall not be going back there for the foreseeable future."
Knott-Craig said earlier this year that two of its shareholders - Vodafone, which owns a 35 percent stake, and SBC Communications, which has an indirect stake in Vodacom through Telkom - were concerned about compliance with the US Foreign Corrupt Practices Act. The law, which threatens fines and jail terms, is designed to stop US multinationals and corporates and those companies with business in the US from engaging in corrupt practices. "If it were not for that, we would be operating in Nigeria now," Knott-Craig told Moneyweb earlier this year.
According to This Day "brokerage or finder's" fees were paid to Oceanic Securities Limited, Bromley Asset Management Ltd and Empee Ventures Limited, companies which had approached, Lagos, Delta and Akwa Ibom state governments respectively and convinced them to make investments in the former EWN. The companies had asked for 10 per cent of the investments made by the State Governments.
Oceanic Securities and Bromley were paid N71.4 million each through a Universal Trust Bank cheque and Intercontinental Bank cheque respectively while Empee was paid a total of N229 million through Lead Bank and National Bank of Nigeria cheques.
According to Business Day Vodacom had already been warned of issues likely to make a potential investor wary. Those warnings came from Econet Wireless International, which holds 5% of the Nigerian company and has instigated legal action to prevent Vodacom from taking over, claiming a pre-emptive right to buy any of the Nigerian shares put up for sale.
"We don't know what Vodacom found but we alerted Mthembu to issues pertinent to any operator seeking to run an aboveboard operation in Nigeria," said Econet Wireless International executive Kevin Kachidza. "We believe we can manage those issues because we were the whistle-blower in the first place," he said.
Deputy CEO Andrew Mthembu, Vodacom who headed its international operations, has had his contract terminated and Strategy Director Robert Pasley has resigned. Willem Swart, put in as CEO, has resigned from Vodacom, but will remain with Vee Networks as its CEO.
According to This Day Mthembu and Pasley are said to have been in breach of Vodacom's corporate governance principles by providing a "side agreement" which had served as a "letter of comfort" to the former EWN without the knowledge or ratification by the board before the Management Agreement was signed. The Vodacom board had included some clauses in the provisional agreement and had expected Vee Network (formerly EWN) to fulfil them.
Vee Networks Public Relations Manager, Emeka Opara, said last week that "Vodacom had last week issued a statement in South Africa to the effect that it did not find any evidence of corruption in Vee Networks after a thorough due diligence."
According to Opara, the Vodacom's statement stated inter alia: "Whilst Vodacom has a management agreement to manage Vee Networks previously known as EWN [Econet Wireless Nigeria] as from 1 April 2004, no decision has been made to conclude a transaction whereby Vodacom will acquire equity in any company effectively controlling Vee Networks.
"The previous management of EWN paid approximately 50% of brokerage fees, as approved by the Board of EWN in 2002, during the course of 2003. These brokerage fees were for raising equity in EWN".
"After receiving allegations that the monies so paid in 2003 were improper, Vodacom engaged the services of expert legal counsel to do a due diligence in order to ascertain whether those allegations were true.
"As a result of the ensuing due diligence legal counsel concluded that no evidence could be found to suggest that they were improper. The balance, approximately 50%, of the brokerage fees is still outstanding."
According to This Day, in a post pull-out agreement with the Board of Vee Network, both parties agreed that personnel could transfer without statutory notice periods and loss of benefits. Vee Network would be allowed to trade with the Vee Network brand name for only three months ending September 1, 2004 or until the Nigerian company finds another partner or change names but within the three-month period. It was also agreed that Vodacom in all its correspondences and statements about the pullout from Nigeria will desist from alleging that it was because of corruption as Vee Network insisted the brokerage payments were not bribes.