US embassy cable - 02ABUJA1024

UNCLAS SECTION 01 OF 03 ABUJA 001024 
 
SIPDIS 
 
 
DEPT PASS TO EXIM, OPIC 
LONDON FOR AFRICA WATCHERS 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, BEXP, ECPS, EINV, PGOV, NI 
SUBJECT: NIGERIA: NITEL PRIVATIZATION HITS DEAD-END AS IIL 
FAILS TO MEET PAYMENT DEADLINE 
 
 
REF: LAGOS 597 
 
 
1.  Summary:  Investors International (London), Ltd. (IIL) 
was unable to meet the GON deadline for its $1.185 billion 
payment for NITEL.  The GON must now decide what to do with 
NITEL, IIL, and the privatization process. Of immediate issue 
is whether the GON will refund IIL,s 10% deposit.  Through 
its loan to IIL for the purchase of NITEL, First Bank of 
Nigeria is deeply exposed and may face financial losses; 
however, FBN will no doubt weather the storm.  The same 
cannot be said about the GON privatization process and the 
future of NITEL.  End Summary. 
 
 
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IIL Fails to Come Up with a Billion - Plus 
------------------------------------------- 
 
 
2. Investors International (London), Ltd. (IIL), the 
preferred bidder for Nigeria Telecommunications Limited 
(NITEL), failed to meet the March 26 deadline for payment of 
the outstanding balance ($1.185 billion) to purchase 51 
percent of NITEL.  IIL had earlier deposited 10 percent of 
the total bid price ($1.318 billion) as a non-refundable 
earnest money deposit.  This latest collapse follows IIL,s 
inability to raise enough capital to meet an earlier February 
deadline.  At that time the Bureau for Public Enterprises 
(the GON privatization agency) acceded to IIL,s request for 
a six weeks extension to obtain the needed financing. 
Initially, IIL had hoped to raise roughly half of the 
financing from the international capital market.  This did 
not happen as investor interest abroad did not materialize. 
Compounding this problem was the reported failure of the core 
investors to come up with the approximately $500 million that 
they had earlier promised.  While the soft world telecom 
market did not help IIL,s efforts, a perception that IIL 
grossly overbid for NITEL essentially sealed their fate. 
 
 
---------------------------- 
Where Does BPE Go from Here? 
---------------------------- 
 
 
3. With the IIL purchase of NITEL in tatters, BPE is weighing 
one or several possible options.  However, the Presidency, 
not the BPE, will ultimately decide the issue. The identified 
options are: 
 
 
-- To commence negotiations with Newtel, the third-ranked 
bidder with an offer price of $1.02 billion.  (The 
second-ranked bidder, Telnet, has withdrawn its offer.) 
 
 
-- To re-advertise the NITEL bid and start over. 
 
 
-- To develop more efficient service and improve NITEL's 
competitiveness by entering into a management contract with a 
private telecommunications operator to manage a 
government-owned NITEL.  One possible partner mentioned was 
Korea Telecom. 
 
 
-- To sell 20 percent of the GON's 49 percent holdings on the 
Nigerian Stock Exchange. 
 
 
4. A secondary, but important, issue related to IIL's failed 
bid is whether to refund IIL's 10 percent deposit of $131.7 
million.  According to the bid offer terms, the 10 percent 
deposit is nonrefundable and the BPE has formally recommended 
to the President that the deposit not be refunded.  (If BPE 
retains the IIL earnest money, BPE would cut its losses.)  On 
the other hand, the GON knows that harsh treatment of IIL 
does its future privatization efforts no good.  One 
compromise the GON is weighing is to provide IIL a 5 percent 
equity stake in NITEL as compensation for its lost deposit. 
Such an offer might be unattractive to IIL, especially since 
any future dividends from NITEL would be many years away. 
 
 
--------------------------------------------- ----------- 
Does Earlier Treatment of CIL Come Back to Bite the GON? 
--------------------------------------------- ----------- 
 
 
5. Ironically, any decision to be lenient with IIL calls into 
question the GON,s earlier treatment of Communication 
Investment Limited (CIL) during the 2001 GSM auction process. 
 Along with Econet and MTN, CIL had agreed to pay $285 
million, the bid price, for a GSM license.  However, the 
license was promptly revoked when the group failed to meet 
the strict deadline for deposit of the funds into the GON 
account at Chase Manhattan Bank, New York.  Despite extensive 
and highly publicized efforts by CIL to get the GON to 
reconsider what many felt was an unduly harsh application of 
the auction payment rules, the Government (in the person of 
Nigerian Communications Commission Vice Chairman Ernest 
Ndukwe) refused to overrule the decision.  That decision may 
now come back to haunt the GON (which, some surmise, had its 
own reasons for treating CIL so rigidly.) 
 
 
-------------------------------------- 
A Fine Mess for First Bank of Nigeria? 
-------------------------------------- 
 
 
6. Another critical issue to be considered is the potential 
financial impact from the IIL debacle on First Bank of 
Nigeria (FBN), Nigeria,s oldest and largest bank.  No doubt 
First Bank,s image will be bruised.  FBN lent $96 million 
(in dollars) to IIL for the down payment on the winning NITEL 
bid, and broke numerous Central Bank of Nigeria (CBN) rules 
to do so.  First, the amount lent to IIL by FBN  almost 
doubled the CBN,s single obligor lending limit of 35 percent 
-- and the CBN has already threatened First Bank with 
sanctions for doing so.  FBN also failed to report to CBN the 
amount as a loan.  But the terms of FBN,s role in the IIL 
bid were never a secret and some people question why the CBN 
waited until now to make a fuss.  A more appropriate question 
though is why did FBN so blatantly ignore the rules?  One 
speculative answer may be that the temptation to acquire 
monopolistic leverage over Nigeria,s telecom sector was just 
too much for Nigeria,s most market-focused, domineering bank 
to pass up. But only FBN management knows the truth. 
 
 
7. While First Bank,s image among those in the know has no 
doubt been severely tarnished, the impact on Bank operations 
may not be that great.  First Bank Managing Director Bernard 
Longe told Econcouns that he believed it is highly unlikely 
the deposit will be forfeited (wishful thinking?).  But any 
write-off of the loan, in what Longe described as a worse 
case scenario, could be easily spread over 2-3 years.  FBN 
would appear to be in a relatively good position to absorb 
the loss, if necessary. Longe indicated that FBN,s profit 
during the last nine months was N7 billion (about $60 
million.)  In recent weeks FBN,s stock price has remained 
relatively stable and there is no evidence of distress caused 
by panicky depositors.  Smart investors in FBN probably 
already had discounted the impact of the NITEL debacle on the 
Bank,s share prices. 
 
 
8. On the contrary, an unrelated development actually is 
helping FBN. The CBN,s suspension last week of 21 commercial 
banks from transacting foreign exchange under the Interbank 
Foreign Exchange Market (IFEM) serves to encourage customers 
seeking safety to retreat to First Bank, long considered the 
bastion of safe banking in Nigeria.  A banking crisis among 
Nigeria,s weaker institutions actually is good for FBN. 
 
 
-------------------------------------------- 
Privatization: This Is Not BPE's Finest Hour 
-------------------------------------------- 
 
 
9.  The collapse of IIL's bid represents a major setback to 
the GON's privatization program and the prestige of the BPE. 
Many observers had cited the NITEL sale as an important 
success story for Nigeria ) a success story now beset by 
controversy, certain complication and potential failure. 
Never popular with Nieria's elites accustomed to making use 
of the patronage possibilities offered by state-owned 
enterprises, BPE now faces serious questions about its 
handling of the NITEL privatization in public hearings by the 
House of Representatives.  These hearings might make 
potential foreign investors even more wary of NITEL.  The 
pending decision on the disposal of the 10 percent down 
payment might also have an impact on the future of the 
privatization program.  Notwithstanding CIL, investors might 
lose interest in participating in Nigeria,s privatization 
process if the investment risks are perceived as too great. 
 
 
10. The effect of an eventual outright forfeiture of IIL's 
deposit on Nigeria's financial sector is not likely to be as 
severe as reported in the Nigerian press.  Managing Director 
Longe might not be so lucky.  Despite whatever becomes of the 
earnest money deposit and of First Bank's fate, other 
Nigerian financial institutions will be shy to lend on any 
future NITEL bid process and will participate reticently in 
any large privatization purchase. 
 
 
11. All agree NITEL was hugely overbid.  In the domestic 
market, the GON's move to license a second national carrier, 
combined with the successful GSM licensing in 2001, continues 
to reduce NITEL's prospective profitability.  Moreover, the 
NITEL privatization process, at the direction of President 
Obasanjo, was implemented faster than many expected with 
perhaps not enough due diligence on the financial standing of 
the bidders.  BPE did not provide IIL enough of a cushion, 
less than three short months plus six weeks, to pull such a 
huge financial deal.  Finally, the recently announced 
&separation8 between the IMF and the GON could not have 
come at a worse time for the NITEL privatization.  With world 
telecom markets already suffering, investors in the telecom 
industry will not view Nigeria as fertile ground in which to 
plant their money. 
Jeter