After emerging as one of the two provisional winners of the 5G spectrum licence, Mafab Communications has set out plans to become a major Nigeria’s telecommunications operator, according to a proposed document seen by BusinessDay.
In the document, the company discloses it is going to the market to raise $350 million via equity to finance the cost of the spectrum licence and other associated projects costs.
The little known telecom operator is hoping to complete the funding before the licence fee deadline. The Nigerian Communications Commission (NCC) had noted that the two winners were expected to complete payment of the winning bid price for the auction at $273.6 million for each lot of 100 MHz TDD licence by February 24, 2022. That means Mafab Communications has less than seven weeks to come up with the money.
In the document, Mafab is not only looking to raise $350 million via equity, but also intends to raise $1.59 billion via debt to complete a total of $1.9 billion funding activity. Mafab plans to offer 70 million units of its shares at N5 for equity funding.
The company has a broad target of deploying into over 6,000 sites within a five-year period. Sites here may refer to the 40,000 base transceiver sites that are located in different parts of Nigeria. It intends to deploy into 1,000 sites in the first year, 2,500 in the second year, 4,000 in the third year, 5,000 in the fourth year, and 6,000 in the fifth year. Within that timeline, the company also hopes to have grown its subscriber base to 7.5 million.
To achieve the targets, it has itemised three strategies – first of which is to secure the licence for 5G. However, deploying the 5G network without pre-existing 3G or 4G infrastructure will be a tall order for the company.
Therefore, the second strategy is to obtain 3G and 4G deployment licences. In doing this, it outlines two options. The first is to propose this to the NCC as support for the New Entrant National Carrier to provide diverse services. The second is to acquire an existing telco and use the acquired telco’s existing infrastructure and licence in the delivery of 3G and 4G services.
The third strategy involves the acquisition of operational assets such as a full Network Functions Virtualisation (NFV) architecture and modular data centres. NFV allows for the separation of communication services from dedicated hardware, such as routers and firewalls. This separation means network operations can provide new services dynamically and without installing new hardware.
Deploying network components with network functions virtualisation takes hours instead of months, like with traditional networking. Also, the virtualised services can run on less expensive, generic servers instead of proprietary hardware.
Mafab, as well as MTN Nigeria, is required to pay the $273 million licence fee in naira at the prevailing Central Bank of Nigeria (CBN) exchange rate. This may be the company’s first major headache.
The naira is currently undergoing a period of high volatility. While the rate on the day the auction was concluded was N414, the naira has further weakened against the dollar ending the year on Friday, December 31, 2021, at N435 after the CBN adjusted the country’s exchange rate on its website to N413.49 to a dollar.
In May, the apex bank devalued the naira from N379 to N411 per dollar after adopting the Investors and Exporters (I&E) window rate, also known as NAFEX rate.
The NAFEX rate, the official rate by the CBN, has oscillated between N414 and N415 in the past three months before the sudden fall to N435. The implication for Mafab is that if it had paid for the 5G licence on the day the announcement was made in naira at the prevailing CBN exchange rate as stipulated by the NCC, it would only have paid about N113 billion ($273 at N414 rate).
Experts say the devaluation on December 31 may not be the last as the CBN could be using it as a strategy to balance the trade deficit. A country that imports more than it exports is likely to devalue its currency to reduce importation and thereby increase export.
This may not necessarily be to the advantage of Mafab and MTN, which would need to import most of the infrastructure they would need for the eventual deployment of 5G.
An expert, who pleaded anonymity, says Mafab’s plan to raise equity is expected, but the concern for many investors would be how the company intends to pay back given that it is relatively new in the market and has little experience compared with its direct competitor, MTN Nigeria.
“The company and backers are relatively untested. I hope it doesn’t end up like Etisalat’s $1.2 billion bad debt,” the expert says.
Another expert notes that the intention to raise equity would mean that Mafab did not have the money for the licence in the first place, nevertheless, it still went ahead to participate in the auction and as far as raising the price to such an extent that a notable existing operator like Airtel Africa, which last bid was at $270 million, had to exit the auction paving the way for Mafab to emerge.
The company’s subscriber growth projection also comes across as too ambitious, especially for the internet market segment. It projects the acquisition of 1.5 million subscribers in the first year. It plans to double the figure to 3 million subscribers in the second year and going on to achieve a 65 percent growth in the third year at 5 million. It expects the growth to slow by about 35 percent in the fourth year at 6 million and the fifth year at 7 million.
First, it needs to be said that subscriber growth in the telecom industry in recent years is not what it used to be like in 2014 and 2015, when broadband penetration was at less than 20 percent. Subscriber growth started fluctuating widely in 2016, with established operators like MTN and 9Mobile (then Etisalat) seeing declines in data subscription. Globacom and Airtel, which gained, did not see the big growth margins from the previous years.
While 2017 was a big year for MTN and Airtel, it wasn’t for Globacom and 9Mobile, which continued to see declines. Globacom managed to turn the tide in 2018, joining the likes of MTN and Airtel, whereas 9Mobile stayed on the losing end.
In 2019, Globacom missed a slide into decline by the whiskers to again join MTN and Airtel on the gainers’ table, but 9Mobile wouldn’t bulge from losing. 2020 was another big year for all the telcos with the exception of 9Mobile. However, 2021 ended in red for all four operators.
Mafab’s five-year growth projection may not have taken appropriate considerations of the current realities. Growth generally has slowed down in the industry driven by the country’s poor economic condition, which has affected many subscribers’ income levels.
Teniola Olusola, national coordinator, Alliance for Affordable Internet, told BusinessDay that a scenario was being played out with the transaction proposal from Mafab.
First, the proposal is not based on the company’s track record as a telecom operator hence the big investors in Nigeria are not likely to come on board as they would consider the risk of backing a relatively unknown operator as too high.
Mafab would then need to turn its attention to foreign investors. Even then, the company would need to prove a strong economic case for 5G in Nigeria to get the support of the big investors.
The biggest cost for Mafab is not just settling the licence fee. The bigger expenditure begins with setting up infrastructure that will power the service it has got the licence for. While acquiring an existing telco may give it a head-start, it also comes with new challenges, like assuming control of the old telco’s existing liabilities, including debt and operational inefficiencies.
Otherwise, Teniola sees a scenario where Mafab is not able to meet up with the licence fee as a result of its inability to raise funding and putting the NCC in a tight corner of whether to conduct a fresh auction or issue the licence to Airtel, which was outbid.
The transaction proposal also notes that Mafab’s parent company, Althani Group of Companies Limited, a company established 15 years ago, makes an annual turnover of over $450 million. The company also holds an operational interest in the banking, banking, insurance, hospitality, and telecom spheres of the Nigerian economy. Should the parent company decide to help offset the licence fee, would it not be exposing the other business interests?
“In this endeavour, the company has enlisted Parallel Wireless Incorporated (PWL) and IPLOOK Technologies Co. Limited (IPLOOK) as technical partners. PWL is a telecom company in the US licensed to design and maintain cellular networks. The entity is the only US company challenging the world’s legacy vendors with the industry’s only unified software-enabled solution. IPLOOK is a Hong Kong company that acts as software and consulting house that will supply and install the 5G spectrum,” the transaction document notes.