Over a decade separates Alheri Engineering’s failed ambition to become a telecom operator from Mafab Communications’ hair-raising feat of securing a provisional 5G licence barely one year after it was incorporated and ahead of an established player like Airtel.
Nevertheless, both share so many things in common, and Mafab could draw lessons from what brought Alheri’s quest to an abrupt end.
Let’s set the stage
On February 24, the Nigerian Communications Commission (NCC) is expected to announce the receipt of a $273 million payment for a 5G spectrum licence from Mafab Communications and MTN Nigeria.
MTN is to pay an additional $15.9 million to be assigned the preferred Lot One (3500-3600MHz), while Mafab was assigned Lot Two (3700-3800MHz), at no extra cost. In addition, Mafab is required to acquire a Unified Access Service Licence, which is the operational licence for the frequency spectrum at an additional fee of N374.6 million (approximately $905,000).
MTN, being an old horse in the Nigerian telecom space, has been busy closing funding in preparation for the licence and launch of the technology. Mafab on the other hand, a newbie, is shopping for $350 million to pay off the licence as BusinessDay reported. It has less than six weeks to convince investors it is a serious player and deserving of the funding.
While some sources say Mafab has about four credible and well-known investors backing its telecom bid, there are concerns its lack of experience may pose a barrier to securing the money it is looking for. A bigger problem for Mafab is after purchasing the licence, what would it do with it?
Mafab may find itself in the same situation as Alheri Engineering after securing a 3G licence in 2007 and could not deploy for about two years.
The 3G auction in 2007
In 2006, the NCC, riding on the success of the GSM auction of 2001, the deployment and growing mobile adoption, announced its intention to introduce third-generation (3G) technology in Nigeria. 3G is an upgrade over 2G, 2.5G, GPRS, and 2.75G EDGE networks, offering faster data transfer and better voice quality.
The commission granted pre-trial approvals to Huawei, Ericsson, and Alcatel in preparation for the commercial launch of 3G.
After the successful pre-trial, the NCC on February 2, 2007, announced the plan to commence the licensing of 3G spectrum in the 2 gigahertz (GHz) and 450 megahertz (MHz) bands through an auction process. Participation in the auction was to be limited to existing licensed network operators in Nigeria who meet the pre-qualification criteria.
Like the 5G auction, the NCC did not quite define what it meant by an “existing” network, except to place emphasis more on the “licensed network operators.” The licensed operators qualified to bid for the 3G technology include those with universal access service licences; digital mobile licences’ fixed wireless access licences; national carrier licences; and private network links licences.
The NCC invited bids for the 40MHz of spectrum within the 2GHz band in four paired blocks of 10MHz each. The commission in a notice and information memorandum (IM) set the reserve price of $150 million for each 3G spectrum; potential bidders were required to pay a deposit of $15 million (10% of the reserve price). The deadline for submission of the applications and deposits was set on March 16, 2007, while the auction was scheduled to take place on April 2, 2007.
There were 17 companies that indicated interest in securing the licence, however, the NCC announced that only four companies were able to successfully submit their applications. The four companies announced winners include MTN Nigeria, Celtel Nigeria, Globacom, and Alheri Engineering.
Once upon a telco newcomer
Alheri Engineering, until the auction of the 3G licence and its eventual emergence as one of the four winners, was not known as a telecom operator.
Alheri Engineering Company was incorporated in 1985 as an unlimited company. Like Mafab, Alheri entered the auction having no footprint in telecom and without owning a GSM licence like its three competitors.
Experts say it would be nearly impossible to deploy a 3G network independent of a 2G network.
Alheri, knowing this, still went ahead to pay for the licence. According to reports, the company had hoped to acquire the GSM or 2G licence from NCC after it secured the 3G licence. This proved to be difficult for the young company.
It later was compelled – mostly by NCC and market forces – to sell the licence to Etisalat at a price of $250 million, which was a healthy profit from the $150 million it was acquired.
Alheri’s failure reflects market realities
A source familiar with the industry told BusinessDay the issue was a return on invested capital. The existing operators in the market such as MTN Nigeria and Globacom had spent capital building a large-scale 2G network infrastructure. Hence, it wasn’t so difficult to deploy 3G.
“3G or any new technology also has slow uptake yet you need the scale and breadth (of 2G network infrastructure), or you would build a national network to only be able to sell to a small segment of the market. It is difficult to compete,” the source said.
It was primarily the same issues that dogged Etisalat, which acquired the licence from Alheri. The UAE-based telco had to acquire debt from banks which eventually was difficult to manage and compete effectively with existing long-term players.
Even Celtel, a subsidiary of MTC, which acquired a controlling stake of 65 percent in Vmobile at a value of $1.005 billion, struggled a bit to adjust to the competition and later re-branded to Zain. Zain Africa was eventually acquired by Bharti Airtel in a deal worth $10.7 billion.
“That is exactly the same issue you will have with 5G,” the source said.
The challenges ahead
A recent report compiled by researchers at Advocaat, a legal services company, captures several hurdles 5G operators have to face. Prominent on the list is the availability and affordability of 5G devices in Nigeria. This challenge has been a recurrent one for the previous generations of networks such as 4G. The researchers see this continuing with 5G technology. They predict that this will force operators to deploy services in major cities where there will be customers that can afford the devices and the cost of the service.
A top challenge for operators will also be the low levels of fibre optic infrastructure across the country. To achieve full broadband penetration, Nigeria requires 120,000km of fibre installed considering the country’s landmass. Nigeria currently has a deficit of about 80,000km of fibre, which needs to be met before effective nationwide deployment of broadband can be achieved. When installed, the authorities would need to come up with a better strategy on how to protect the fibre from vandalism and damage from road construction.
The 5G operators would also face challenges with the high volatility in the foreign exchange market. The industry as a whole relies heavily on foreign equipment manufacturers and imported technical expertise for the deployment and maintenance of networks.
Erratic electricity supply will also be a hurdle that the operators need to confront. 5G technology deployment and maintenance require higher density coverage, more base stations, additional equipment, and consequently more power demand.
“Just as with the roll-out of previous generation networks, telecom companies will have to invest, now at much higher levels, to meet the increased power requirements of the 5G network because of the poor state of the country’s power infrastructure. This will increase the cost of deployment and were not properly dimensioned, may affect the quality of service and consequently, the cost will be passed on to consumers,” the researchers noted.
Way-out for Mafab
After securing the 5G licence in February, Mafab’s best chance of avoiding the mistakes of Alheri is through a merger and acquisition, according to several experts that spoke with BusinessDay on condition of anonymity.
This is however not an easy plan as Alheri had to discover when it attempted to buy the defunct Nigeria Telecommunication Limited (NITEL) to pave the way for its GSM journey. After several attempts to sell off the government-owned telecom operator, NATCOM, a consortium of seven Nigerian companies, emerged the new owners of NITEL and MTEL by offering to pay $252 million, an amount said to have met the bid price set by the Bureau of Public Enterprise (BPE). NATCOM has since onboarded the assets into its company ntel.
Given that there are no more dead assets like NITEL to buy, Mafab will need to cough out more money – from $1 billion and above – to be able to acquire an existing telco, even if it is one that is struggling to survive.
Mafab will also need to have a solid plan to pay off the $1.9 billion in equity and debt it is looking to raise from investors. Failure to pay could see it become another Etisalat.
Finally, in a worst-case scenario, Mafab emulates Alheri by securing the 5G licence and trading it for a much higher price.
