MTN tries to regroup after $5.2bn Nigeria fine and mis-steps

As Nigeria emerged from years of military rule, the west African nation was still considered a high-risk market where few international companies, outside of the lucrative oil sector, dared to tread.

When Nigeria launched an auction for mobile phone licences in 2001, the bidding was dominated by fledgling African companies. Among the winners, willing to pay $285m for a licence was MTN, a young South African company. It shares quickly slipped by about 4 per cent, amid concerns that it had overpaid.

MTN saw a bright future, betting that the number of Nigerian mobile users would rise by 10m in a decade. Fourteen years later, Africa’s most populous nation is the company’s biggest market, with more than 62m subscribers generating $4bn in revenues last year — just over a third of the group’s total sales.

It is a tale that illustrates how MTN rapidly became Africa’s largest mobile phone operator by investing in high-risk, high-return destinations, reports the Financial Times.

But since it was revealed on October 26 that Nigerian regulators had imposed a $5.2bn fine on MTN over the group’s failure to disconnect 5.1m unregistered Sim cards, more than $7bn has been wiped off its stock market capitalisation.

Its chief executive, SifisoDabengwa, resigned last week over the scandal and analysts suspect he will not be the last to leave the company.

Many now expect the axe to fall on the leadership in Nigeria, to which MTN had sent a female Indian COO in September to take up a good share of the responsibilities of the CEO.

MTN said on Monday that Nigerian regulators had extended its deadline for paying the levy and that negotiations were continuing to reach a settlement.

But the damage to one of Africa’s top brands is evident.

“In a sense the shine has been lost and there’s been a lot of brand equity destruction. Never mind the regulatory issues, even from a network performance and service provision, in Nigeria they’ve taken their eye of the ball,” says a telecoms analyst. “It applies to a lot of their markets.”

The analyst adds that after enjoying first-mover status in embryonic markets in many of the areas it operates, MTN has been slow to adapt to increased competition and evolving regulatory environments.

Most telling has been the criticism emanating from the Public Investment Corporation, South Africa’s powerful state-owned pension fund manager which is MTN’s largest shareholder. Typically a champion of South African companies, the PIC has been surprisingly frank in questioning “the role of the risk and compliance function within MTN”.

It added that the group needs to ensure it “complies with laws and regulations wherever it operates”.

It is not the first time MTN has been embroiled in controversy.

Three years ago, the group had to defend itself against accusations by Turkcell, its Turkish rival, that it corruptly secured its mobile licence in Iran, MTN’s second-largest market in terms of subscribers. MTN group has vehemently denied the allegations, but the Turkish group is suing its South African rival.

Still, MTN’s appetite for risk seems undiminished. In January, it completed the conversion of its “build, operate and transfer” contract in Syria into a 20-year full operating licence, in spite of the conflict raging in the country.

It has also fended off allegations in the South African and Nigeria media that it used transfer pricing to take billions of rand offshore from its operations in Nigeria and Ghana to subsidiaries in Mauritius and Dubai in the form of management fees, to lower its tax liabilities. MTN dismisses the allegations, saying all relevant taxes were paid. It also insists that it has conducted its business in Nigeria “in accordance with established principles related to sound corporate governance”.

The full extent of the damage of the Sim-card related dispute will depend on the final size of the penalty and over what timeframe it has to be paid. Much now rests of the shoulders of PhuthumaNhleko, MTN’s chairman and a former chief executive, who will head the company for up to six months, following Dabengwa’s resignation.

Nhleko was widely respected during a nine-year stint as chief executive that ended in 2011. During that period, he oversaw much of the group’s expansion — including its moves into the Middle East — but he faces a tough task repairing the company’s image.

Investors have already voiced their concerns with the sell-off in shares.

“We have to appreciate that MTN is what it is now because of the risk they took in their expansion strategy,” says Sibonginkosi Nyanga, a telecoms analyst at Momentum SP Reid, a regional financial house. But “from an investor perspective it’s quite damaging because there are so many questions that are being asked”.