Show me the money - English judge on Econet: “serious non-disclosure or misrepresentation of true position”

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In handing down judgement between Econet Wireless Ltd and Vee Networks Ltd and ORS, English judge Justice Morison said that:”There was serious non-disclosure or misrepresentation of the true position as to Econet’s access to funds as at 15 May and 18 May 2006.” Russell Southwood looks at the issues raised by the judgement for both the future of Econet and regional mobile players on the continent.

The long-running legal battle over Vee Networks Ltd of Nigeria goes back to a shareholder agreement signed between the founders of the company. Although there are many other complicated parts of the story, the essence of the founding shareholder agreement was that “the said Parties” (to the agreement) had “the first right of refusal” should any of the others wish to sell any of the shares in what was Econet Wireless Nigeria. Econet (which is a minority shareholder) has always maintained that it was not given the opportunity to purchase the shares that were to be sold to Vodacom. The governing law for the Shareholders Agreement “was expressly stated to be Nigerian Federal Law.” Nevertheless the injunction was sought by Econet in the English courts.

With the failure of the sale to Vodacom, in mid-April 2006 Celtel made an offer to buy the shares from the Nigerian shareholders for a price of some US$755 million together with vendors’ “put options” worth about US$460 million, giving a total price of US$1.2 billion. In addition it agreed to invest a further US$250 million into the company by subscribing further shares: the requirement to invest this level of money gives some idea of the impact of the company’s lack of access to capital raising during the long shareholder battle.

In line with the shareholder agreement, the Nigerian shareholders wrote to Econet saying that they were “minded to accept Celtel’s offer” and were giving Econet the right of first refusal in respect of their shares. Judge Morison said that:”On 2 May 2006 Econet purported to accept, unconditionally, the offer of pre-emption.” In other words if Econet could match or exceed  Celtel’s offer, the company would be in its hands. On 9 May Econet’s Nigerian lawyers received the transaction documents with confirmation that the deadline for payment was 18 May 2006.

Econet wanted an extension of time because it said that the transaction documents were not in an acceptable form to Econet and its financiers. However in an application for an injunction to the English courts on 13 May 2006, its lawyer (basing his evidence on his own knowledge or “supplied to me by the source stated”) said:”The Applicant (Econet) has access to the funds to enable it to make the payment of US$1,215,823,497.60 subject to obtaining the Transaction Documents mutatis mutandis in executed form and subject to the appointment of an agreed escrow agent can then make payment.”

But as Judge Morison stated in his judgement:”But even taking his figures at best, and ignoring qualifications and pre-conditions, on the figures, the total amount was US$90 million short. But realistically the equity funding (supposedly for US$400 million) was not committed but rather was offered subject to conditions; and of the debt funding (US$975 millions) there was a contractual commitment as to part and no contractual commitment as to US$475 million.”

All this led Judge Morrison to the unequivocal statement that:”Accordingly, the bald statement that as at 15 May Econet ‘has access to the funds to enable it to make the payments’ subject to the completion of the transaction documents and agreement as to the identity of an escrow agent was not true.” He also emphasised that:”It was also a statement that was not made on the basis of the deponent’s (the lawyers’s) own knowledge.” The statement was made on the basis of evidence supplied by Econet but it was not stated to be the source and “a disclosure application had to be made to Coleman J to obtain it.”

Why might all this matter in the broader scheme of things? There are two reasons: one narrow and particular to Econet and the second affecting the broader fate of regional mobile players.

Econet has developed its mobile operation by often acting as a minority partner to local shareholders. By contrast in Kenya, it sought to go in with the Kenyan Federation of Co-operatives and Rapsel as minorities. Unfortunately neither was able to come up with its end promised funding and Econet (after court action in Kenya) said that it would proceed alone. So on 3 March 2005 Zachary Wazara, local Econet Manager said:”We have already purchased network equipment, which is now expected to arrive in Kenya shortly” and that the roll-out would shortly begin. Econet is currently engaged in a defamation action with the former Kenyan Communications Minister Raphael Tuju and there the matter rests for now.

Econet has twice been in preparation for an IPO, most recently it announced its intention last year. It has also spoken of its desire to be the first East African IPO in support its roll-out in Kenya. It went into alliance with South African Altech that had the money to back its expansion but the two parties fell out. Econet has an option to buy Eskom’s shares in Telecom Lesotho that it has announced that it wishes to sell. But there has been no public movement on this issue.

By any fair judgement, Econet would appear to be boxed in by the difficulties of raising unconditional funds to support its expansion, notwithstanding its recent small purchase in Burundi. However, it is not alone in this difficulty. Vodacom’s CEO Alan Knott-Craig recently announced that the sale prices of mobile operations of significant scale were too high for them to bid for. Anyone in this position says that the prices are too high to make commercial sense and who is to say they are wrong? But these are the prices market players are willing to part with and you are either in the game or you are losing points (and market share which will cut share value) to your rivals.

The latest deal to come on to the market illustrates both the level of competition and the complexities involved. Cameroon’s incumbent Camtel (see Telecom News) has been fattened up for market with the addition of a mobile operation. Cameroon is one of Africa’s larger mid-scale markets and is therefore a prize worth winning. There are ten bidders. In addition to having the money for a winning bid, each will need to be able to demonstrate that it can run a fixed network as well as the more lucrative mobile arm.

The long pockets of Arab investors are well in evidence: Kuwaiti-owned Celtel and Etisalat must be among the favourites to win. Cameroon’s two existing mobile operators – Orange (France Telecom) and MTN – are in the bidding but neither would be a competition-enhancing choice, which does not mean they might not be chosen. The uneasy partnership of Telkom SA and Vodacom has also thrown its hat into the ring again.  French ownership is also represented by Maroc Telecom (Vivendi) as it struggles to break into the major league. And down amongst the also-rans are: the Dhabi Group (from the United Arab Emirates), Econet, Essar and Hutchinson and Portugal Telecom (which may itself be bought shortly). The sad truth is that there is now something akin to a feeding frenzy about anything other than small-scale mobile opportunities and there will be casualties – both large and small – as bidders seek to stay in the game.

On this note, we bid farewell to China Mobile’s current bid for Millicom. According to executives privy to the negotiations, it was unable to put a firm offer on the table within a reasonable timescale. Sound familiar?