Buyer beware: Maroc Telecom mired in fall-out from Gabon Telecom purchase
Vivendi-owned Maroc Telecom’s acquisition of Gabon Telecom highlights the pitfalls for any potential buyer of the current crop of African telco incumbents. When you open the cupboard, all of the skeletons come falling out: some you knew about when you bought the company and some you didn’t. Russell Southwood looks at Maroc Telecom’s current sea of troubles.
In February 2007 Maroc Telecom announced it was going to spend US$79 million buying Gabon Telecom. For some there were gasps of amazement as this is a privatisation process that dragged on for a number of years and the Government of Gabon seemed to have finally snagged a buyer
However if the past few weeks are anything to go by, it looks as though it will be a very long haul before the company gets back into a healthy state. At the point of its acquisition, the Chair of the Maroc Telecom board announced that:” Without waiting, we are going to implement a restructuring and development plan that will help this operator to become a jewel of the Gabonese economy and a model for the region, able to offer the best services at the best prices to the population and to companies of this country”.
Five months later it finds itself at the middle of a maelstrom of opposition to the privatisation that has culminated in a challenge to the whole privatisation process in the Constitutional Court. Maroc Telecom has become the subject of a campaign of denigration in the local press over its handling of the privatisation. All the same nationalist rhetoric is rolled out. One opposition politician went as far as to say that the purchase made Gabon a province of Morocco.
So far, so predictable. Privatisations that involve a lot of job cuts are never popular and always highly contested. The opposition to the privatisation is unlikely to succeed but it does make running the business more like fighting an election on an unpopular platform.
But beneath all this sound and fury, there emerges a more damaging tale for the purchaser, Maroc Telecom. Parent company Vivendi announced that it had bought a company that had 30,000 fixed line subscribers and 250,000 mobile subscribers (some 30% of the market). According to the company’s press release, Gabon Telecom and its mobile subsidiary Libertis were generating 137 million euros (US$189 million in revenues). All this was based on the information provided by the seller, the Government of Gabon.
However, the report of the Government’s public accounting body, “les commissaires aux comptes”, which is responsible for auditing Gabon Telecom’s accounts while under public ownership, paints a rather bleaker picture. Indeed it is refusing to sign off the 2006 accounts. It has said that the fixed line operator has lost FCFA50 billion (US$112 million) and its mobile arm, Libertis, has lost FCFA5 billion (US$ 10 million). Losing US$122 million on a claimed turnover of US$189 million is quite an achievement even when judged against the standards of incompetence set by the worst of Africa’s incumbents. Also losing money on a mobile operation of this scale requires a special skill not available in many other African countries.
Whilst the Government said Gabon Telecom had 30,000 fixed line subscribers, the audit body discovered that in fact there were only 22,900 subscribers.
Furthermore the auditors were scathing about the management of the company:”The examination of contracts shows that the majority have been entered into at an extremely high price compared to the market price. Furthermore, customers have been billed for services that have not been provided or only provided at a much lower level than promised.” And as usual, the past management spent money like water and has kept no clear records of what it spent it on, particularly for staff expenses, cars and petrol allocations.
As a result, the company’s outstanding loans have gone up from FCFA68.8 billion to FCFA79.2 billion and its debts have almost doubled from FCFA142 billion to FCFA221 billion. This financial pressure means that the company is, for example, no longer able to terminate calls to Senegal because it has not paid its bills from Sonatel.
On 8 June the new management, under D-G Mostapha Laarabi, called 800 of the company’s staff together to reassure that the company was not going into liquidation. According to Laarabi, it was in the process of winning back the rightful place it should have.
So did Maroc Telecom buy without conducting due diligence? No, it bought the company on the basis that it would accept the information provided on the company, subject to re-adjustment after the 2006 accounts were signed off. This does not appear to be something it made clear at the time of the acquisition. However, it paid FCFA40 billion as an initial purchase price, agreeing to a second payment once the accounts were completed, depending on what was established.
This was exactly the kind of agreement entered into by Celtel when it bought Tanzanian incumbent TTCL and it led to a lengthy dispute. The Tanzanian Government and its auditors maintained that long list of rather elderly “collectibles” represented potential income. Celtel begged to differ. After the lengthy dispute, Celtel relinquished control of the fixed line operation (keeping a shareholding) but walked away with the mobile operation.
The difference in the case of Gabon is that the Government audit body is acknowledging the financial mess the company is in. However, there may still yet be room for differences of opinion once the Government audit body reaches a decision on how to close the accounts for 2006. In the meantime though, Maroc Telecom is in the strange position of having committed to buying the company but the deal having not been finalised. And since there is no Gabonese equivalent of the USA’s Chapter 10 arrangements, it has to negotiate financially choppy waters without knowing what might or might not be investing in.
But even when it is clear that a telco incumbent is financially deeply troubled (like both Gabon Telecom and Nitel), there are nearly always buyers and they appear to pay heavily for what might otherwise be marginally profitable companies. The forthcoming privatisation of Ghana Telecom will almost certainly demonstrate that truth again. Why do they it?
As there are increasingly fewer opportunities to get new mobile licences or acquire mobile operations in Africa, buyers are paying a premium for the “goody” in the lucky dip bag, the mobile operation. African Governments privatising know this and always make sure that a mobile licence is part of the package. However, also taking on a management of change programme in a dodgy fixed line operator is a very high overhead to add to the sale price.
The other asset that Gabon Telecom has that is worth acquiring is its monopoly access to the international fibre SAT3. Gabon Telecom currently offers some of the most expensive bandwidth prices on SAT3 and has not sold as much capacity as others who have lowered their prices. However, it may well have the kind of short-term financial problems suffered by both Ghana Telecom and Nitel that prevented both for a short period of time getting access to more capacity. With a proper price strategy in place and a fibre backhaul network, it could be a convincing wholesale bandwidth provider.
If Gabon Telecom had a fixed line network worth its name, it might also be possible for Maroc Telecom to do the kind low price broadband offers that have kept it dominant in the Moroccan market.
But for now all that can be said is that this one will run and run.