Here is why the $5.2bn fine can kill MTN

MTN Nigeria’s $5.2 billion fine has raised outrage in the financial community but many people outside the financial community have wondered why. For many outside the financial community, a company that has a history of corporate arrogance and poor services should not be allowed to get away with undermining Nigeria in the face significant security challenges like terrorism and high profile kidnapping. 

MTN situation is made worse by the fact that it originates from a country that has not really treated Nigeria and Nigerians very well, especially in the last few months. In the heat of the fight against Boko Haram, South Africa blocked attempts by Nigeria to get arms through the country. There is also the attack on Nigerians and Africans living in the country. So, there is little or no sympathy for a South Africa-owned company in Nigeria, especially outside the financial community.

However, the position of some in the financial community is that while MTN deserves to pay a fine for undermining Nigeria’s security, the current fine slammed on the company is not “payable” without the company folding up its operations in Nigeria. And here is the finance behind that argument.

MTN was given until November 16, 2015 to pay a $5.2 billion fine. This assumes that MTN has $5.2 billion sitting in its bank accounts to hand over to NCC. However, a look at MTN’s most current financial position as at June 2015 shows all the cash that MTN has in the bank is $2.18 billion, just about 42 percent of the fine amount. So, this will not be enough to pay the fine.

But MTN also has about $3.54 billion in current assets. Assuming MTN can convert all its current assets to cash without losing any money on the forced sale value, then MTN can add that to its cash in the bank and raise about $5.7 billon. This will enable it to pay the fine amount of $5.2 billion.

However, the challenge with trying to turn current assets into cash is that you are most unlikely to realize the full amount of the current assets. And it is also not clear what proportion of the current assets is convertible to cash and how fast that can be realized. Inventory is likely to make the good chunk of MTN’s current assets.

But there are other issues that could arise if MTN hands over all the cash it has to NCC. It will be like any person handing over his or her entire savings and also borrowing about a year’s pay to a policeman in order to escape going to jail.

The next question will be how MTN will meet future liabilities without cash and savings, especially when it also has debts that are outstanding. As at June 2015, MTN’s short-term debts stood at $3.5 billion. MTN also had other liabilities to the tune of $4.43 billion. If MTN had handed over all its cash to NCC by last week Monday, the company would not be in position to meet the interest payments that would arise from these liabilities. Most likely the company’s debtors would also force it into bankruptcy because the debtors, many of which are Nigerian banks, would not want payments on their debts delayed as it would impact negatively on the quality of assets on their books.

Some have also argued that MTN can borrow to pay the money. But as can be seen, MTN’s short-term debts already stand at $3.5 billion. A further $5.2 billion debt could take its short-term debts to $8.7 billion and total liabilities to over $13 billion, putting the company’s future revenues under significant pressure and possibly impairing its ability to compete effectively in Nigeria and in the other countries where it has operations.

Besides, Renaissance Capital notes that MTN’s debt to Nigerian banks is already so high that it has limited capacity to borrow further from the Nigerian banking system because of CBN’s regulation that banks cannot lend more than 20 percent of their capital to a single company. RenCap analysis shows that the maximum MTN can borrow from the Nigeria banking system without breaking the CBN rule is $1.7 billion, just about 32 percent of the fine. MTN will have to look for the balance of the funds from outside the Nigerian banking system possibly by borrowing from South African banks.

If MTN decides to borrow externally to settle the fine, it will also be highly risky considering that the future outlook for the naira is negative. Most analysts forecast that the CBN will be forced to devalue the naira sometime in the future. So any external borrowing at this time implies that the MTN’s debt profile could get worse in the near future if the naira is eventually devalued.

It is because of this “killing effect” of the fine on MTN’s continuous existence that many financial analysts have described the fine as “outrageous”. Derrick Irwin, manager of Wells Fargo Advantage Emerging Markets Equity Fund which has investment in MTN, described the MTN fine as “outrageous by any rational stretch of punishing the company”.

One of the biggest fines ever imposed in US history is the BP fine of $18.7 billion in 2012 which was just about 6 percent of BP’s revenue in the same year. The fine on MTN represents about 50 percent of the group’s revenues and more than 100 percent of MTN Nigeria’s revenue. That is why the fine is considered outrageous by any stretch of comparison.

Obviously, the only option for MTN to get out of the “fine jail” without doing much significant damage to the future prospects of its business is to “beg” for a significant reduction to a figure that allows it to pay and still remain in business. This is why the company has engaged in intensive negotiations with the Nigerian authorities since the fine was announced. MTN is in a fight for its survival. Unless the fine is significantly reduced, this may be the end of one of the most successful companies to have come out of Africa. The country that made it big may just be the country that kills it.

Kwaku Brown