Sun Down on Vodacom, Econet Deal

The sun’s down on one of Nigeria’s promising telecom
deals effectively killing a $150 (about N20.4 billion)
equity and $1 (about N136 billion) investment in
Econet Wireless Nigeria (EWN) by Vodacom South Africa.
It is the pact with the shortest life span ever signed
in corporate Nigeria.

Alan Knott-Craig, group chief executive officer of the
Vodacom Group blamed the rupture on absence of good
corporate governance, abuse of its (Vodacom) trust and
insider sabotage. The South African mobile operator
specifically referred to what it considered an untidy
brokerage fees payment involving EWN and three
brokerage firms over which Vodacom.

Knott-Craig said that the case did not border on
corruption and absolved EWN of any trait of corporate
dishonesty in a statement that ironically helped to
throw up questions of corporate probity on the six
weeks Vodacom/Econet marriage. Knott-Craig said losing
the Nigerian market, regarded as Africa’s juiciest,
was a painful thing but “Corporate governance cannot
be compromised for profits. And Vodacom is no
exception.” [Click full text of speech by Knott-Craig]


The deal lasted less than eight weeks - about enough
time to re-brand EWN as Vodacom Nigeria, get some
critical staff on ground including a new CEO from
Vodacom to edge out some of the known faces in the old
EWN. Just when it was time to begin firing shots at
rival networks and there was news in the industry that
workers of those rival networks were making moves to
join Vodacom Nigeria, the deal snapped.

Brokerage Albatross
The so-called brokerage fees albatross is closely
linked with the emergence of EWN itself and is largely
responsible for the crisis that ensued between EWN and
its technical partner Econet Wireless International
(EWI) leading to the cessation of partnership between
EWN and EWI.

To start off business in 2001, EWN had sourced for
venture capital from Lagos, Akwa Ibom and Delta
states. It engaged the services of brokers whom it
agreed to pay 10 per cent of what ever is raised. The
deal was considered unwholesome by EWI which
immediately instituted legal processes to determine if
the brokerage fees were bribes or not.

As at the time EWI instituted the suit, five per cent
of the fees had been paid and further payment stopped
until the determination of the suit. To the founder of
EWI, Strive Massiyiwa, who had relentlessly fought
against the Vodacom/EWN deal that usurped its own pact
with EWN, the fees were suspicious and objectionably
high up over the normal 1-2 per cent.

When Vodacom moved in, as Knott-Craig would alleged in
his statement issued in Johannesburg, there was a
clear understanding that the fees should not be paid
before the management agreement be signed “since that
would constitute a material change of the fact s as we
knew them.” EWN did not keep to this part of the
agreement, a livid Knott-Craig would indicate in his
statement. “We had a clear understanding but Vee chose
to pay without telling us,” captain of the Vodacom
Group told the Financial Times of London at the
severance ceremony between Vee Network and Vodacom.

“As it later transpired, these brokerage fees were
paid by EWN shortly before the management agreement
was signed. When this was discovered, Vodacom demanded
that these fees be returned.” They were returned but
by then “the level of confidence has been affected and
ultimately lead to our withdrawal.” Thus ended, the
briefest and sweetest prospect for top range
competition in Nigeria’s mobile sub-sector.

Facing Future
Vee Network is currently shopping for new a partner
but how soon it could get a one as formidable as
Vodacom is not clear. The operator said it was putting
the issue behind it and concentrating on building its
network as “a world class service provider.” It denied
going against good corporate governance and blamed the
collapse of the partnership on Vodacom’s bid to have
total, uncheck control over the network and its
finances. [Click full text of reaction by Vee Network]
In its loss, it gains Willem Swart who was originally
seconded from Vodacom’s operation in Congo to head its
new operation in Nigeria. Swart “decided to resign
from his position at Vodacom in order to pursue a
career as the Chief Executive Officer of Vee
Networks,” according to a statement jointly signed by
Oba Otudeko, Chairman of Vee Networks, and Alan
Knott-Craig.
As part of the disengagement process, both parties
agreed that Vodacom would continue to provide
technical support to Vee networks for a period of up
to six months would also continue to take an interest
in the success of Vee Networks Limited.

Why the deal died
Vodacom may have found no issue of corruption against
Vee networks but matters bordering on only “corporate
governance, trust and nothing else,” as it tries to
downplay the problem but clearly it found out one
thing: EWN would be a hard nut to crack. Coming and
running Vodacom Nigeria the way its board would have
loved it to would not after all be as easy as it was
designed in far away Johannesburg.

There were too many issues that were taking for
granted as easily surmountable when it was conducting
due diligence on the Nigerian telco. One was the
brokerage fees issue. It, and other issues, turned EWN
against EWI. It killed a team spirit that helped
defeat stronger bidders in 2001 to make EWN get one of
the four coveted mobile licences auctioned by the
regulatory authority.

But Vodacom may have discovered soon after that
managing EWN would be twice tougher than taming MTN’s
unchallenged ride on Nigeria’s telecom turf. The EWI
court case aside, EWN consists of several interest
involving public and private equities. A N4.44 billion
loan from First Bank of Nigeria (FBN) Plc, the
country’s biggest bank, had become an unresolved
dilemma. Buoyed by the tremendous growth in the
telecom sector, FBN was pushing for N2.5 billion of
the total money owed it by the telco converted to
equity holding in EWN.

The brokerage fees issue also raised questions of
corporate morality for Vodacom Nigeria in its brief
life. Directors of EWN that would become part of the
new board for Vodacom Nigeria had interest in some of
the brokerage firms as directors. It was a condition
Massiyiwa was uncomfortable with and for which he led
EWI to institute court action against EWN.

All these combined to make Vodacom’s task of executing
its own brief in Nigeria to curtail South African arch
rival MTN an impossible one. A senior official of Vee
Network told IT Edge: “We know the brokerage thing
was simply used as an excuse, the real reason is that
Vodacom could not have total control of Vodacom
Nigeria the way it had planned to.

“Three weeks after it took over, it was becoming clear
to it that its Nigerian partners were not about to
surrender their grip even if they had granted so many
concessions to make Vodacom come here. Vodacom would
not operate in a place where it does not have absolute
control. They made it known from the word go when they
formally came down.”

Long Road to Nigeria
Even as it buries its short marriage with EWN, Vodacom
said it still has its eyes on Nigeria. Africa’s
biggest mobile telco owned by Telkom of (SA), Vodafone
(UK) and indirectly by SBC Communication (US) sees a
tempting market in Nigeria. Knott- Craig said Vodacom
would continuously strive to enter untapped markets on
the continent. ‘The decision to withdraw from Nigeria
is a blow on our expansion plans,” said the Vodacom’s
boss to the Financial Times. In all, Vodacom has 10.32
million subscribers in about five countries to lead
MTN which has less than nine million.

It had written off the country when plans for GSM
services were first initiated under Gen Sani Abacha,
Nigeria’s late maximum military leader, though it had
not hidden its interest to prospect for business in
the continent’s most populous country. In every four
Africans, one is a Nigerian.

Then, Knott-Craig had made a snide remark that “those
Nigerians are too smart for us” to explain why Vodacom
was shying away from the market when rival MTN was
already making a go it. It was statement intended to
highlight advance fee fraud otherwise called 419 which
had come to be considered a Nigerian phenomenon.
 

But MTN’s success in a relative short time had come to pose a serious challenge for Vodacom which saw the EWN
offer a good one to get even with the fast moving MTN.
Now, that is history. It would have to device another
strategy to enter Nigeria plum market if it is to
sustain its dream of becoming the continents leading
trans-border player. With Nigeria, MTN only needs time
to become the biggest of them all. It is a dream the
Johnic Group member nurses passionately as it expands
service in Nigeria. “It was just an irritant we were
ready to curtail,” an MTN staff in Lagos said of the
botched deal between Vodacom and EWN.

The suits go on
Strive Massiyiwa said he is still studying the
situation in response to Vodacom’s pullout from EWN
now Vee Network. The suit against EWN and Vodacom
remains, said Strive who made great effort to persuade
Vodacom not to deal with EWN with which he is in
contention. Massiyiwa is in court in Nigeria against
EWN and First Bank Plc. He is also asking the court in
South Africa to found Vodacom culpable of inducing EWN
to breach its contract with EWI. He has asked the
court to compel Vodacom to pay EWI damages to the tune
of N244.8 billion.

EWI is still optimistic that there is still a deal for
it at Fortune House, headquarters of the mobile
operator in Lagos were core business decisions of the
Nigerian mobile operator are taking. For Massiyiwa and
his team the re-christening of Vodacom Nigeria to Vee
Network, the third in only six weeks, is only stop-gap
decision. Vee Network would ultimately come back to
bearing its “first and original name.” Zachary Wazara,
EWN’s pioneer CEO who was relieved of his duties in
the heat of the crisis told IT Edge: “What the Lord
doeth is forever! The Lord said that Econet shall be a
household name in Nigeria, and we believe Him!”
Wazara is a Christian ‘born-again’ known in the
Nigerian media for his often quick reference to the
Bible on issues while he was in Nigeria.

The Brokerage Mess (As reported by Russell SouthWood)
According to Business Day, Vodacom had already been
warned of issues likely to make a potential investor
wary. Those warnings came from Econet Wireless
International, which holds 5% of the Nigerian company
and has instigated legal action to prevent Vodacom
from taking over, claiming a pre-emptive right to buy
any of the Nigerian shares put up for sale. "We don't
know what Vodacom found but we alerted Mthembu to
issues pertinent to any operator seeking to run an
aboveboard operation in Nigeria," said Econet Wireless
International executive Kevin Kachidza. "We believe we
can manage those issues because we were the
whistle-blower in the first place," he said. Deputy
CEO Andrew Mthembu, Vodacom who headed its
international operations, has had his contract
terminated and Strategy Director Robert Pasley has
resigned. Willem Swart, put in as CEO, has resigned
from Vodacom, but will remain with Vee Networks as its
CEO.
According to This Day Mthembu and Pasley are said to
have been in breach of Vodacom's corporate governance
principles by providing a "side agreement" which had
served as a "letter of comfort" to the former EWN
without the knowledge or ratification by the board
before the Management Agreement was signed. The
Vodacom board had included some clauses in the
provisional agreement and had expected Vee Network
(formerly EWN) to fulfil them.
Vee Networks Public Relations Manager, Emeka Opara,
said last week that "Vodacom had last week issued a
statement in South Africa to the effect that it did
not find any evidence of corruption in Vee Networks
after a thorough due diligence." According to Opara,
the Vodacom's statement stated inter alia: "Whilst
Vodacom has a management agreement to manage Vee
Networks previously known as EWN [Econet Wireless
Nigeria] as from 1 April 2004, no decision has been
made to conclude a transaction whereby Vodacom will
acquire equity in any company effectively controlling
Vee Networks.”
The previous management of EWN paid approximately 50%
of brokerage fees, as approved by the Board of EWN in
2002, during the course of 2003. These brokerage fees
were for raising equity in EWN". "After receiving
allegations that the monies so paid in 2003 were
improper, Vodacom engaged the services of expert legal
counsel to do a due diligence in order to ascertain
whether those allegations were true. "As a result of
the ensuing due diligence legal counsel concluded that
no evidence could be found to suggest that they were
improper. The balance, approximately 50%, of the
brokerage fees is still outstanding."

 

Re: “Statement by Vodacom CEO on Nigeria” (Vee’s reaction Vodacom’s statement)

The Management of Vee Networks Limited wishes torespond to a statement released earlier this evening
(Wednesday, June 2, 2004) by the Vodacom Group South
Africa entitled “Statement by Vodacom CEO on Nigeria”
on why the company withdrew from Nigeria.
It is important to state that at every meeting held
with Vodacom during the negotiation stages, it was
emphatically stated that the balance of the brokerage
fees to Bromley Limited, Oceanic Securities and Empee
Ventures would be paid. Other than verbally, at no
point did Vodacom demand non-payment of the fees,
despite requests by VNL for a written confirmation of
their opposition to the payment.
In all our dealings, we stand for good corporate
governance and there has been no payment that we have
made without following due process. It is vital to
note that the Vodacom CEO did state in his statement
that Vodacom’s extensive due diligence did not show
any evidence of bribery and/or corruption.
Indeed the Board of VNL subjected itself to onerous
conditions in a bid to facilitate the transaction. It
was, however, a cause for serious concern that Vodacom
wanted full and absolute control of the company and
its finances, even without investing equity in the
company.
We also find it regrettable that this transaction did
not go through, but we have to face up to the
realities of the situation. Our immediate focus is to
continue our quest to provide our subscribers with
telecommunications services of world-class standards
by growing our coverage, expanding our capacity and
improving the quality of our products and services.


FACTS about Vee Network
Vee Network was founded as EWN under the aegis of EWI.
Its shareholders include, EWI, Broad Communications,
Odo Networks, Leadway Assurance, Oba Otudeko, Boye
Olusanya, Bromley Asset, Lagos, Delta, Akwa Ibom
States, First City Monument Bank and First Bank Plc -
A bridge fund was converted to equity of about 20 per
cent.
EWI original 40 per cent equity was reduced to five
percent when founder Massiyiwa could not provide the
back-up finance for the equity share.
Lingering board room crisis worsen in 2003 leading to
cessation of relationship between EWN and EWI and the
forfeiture of EWI’s five per cent equity.
Immediate cause of crisis derived from inability of
EWI to fund a board approved increase of its shares
from five per cent to 33 per cent.
Orason of Egypt and Vodacom of South Africa were
invited to do due diligence. Orason declined.
EWI has sued Vodacom for damages to the tune of N244.8
billion
EWI is in court against EWN and First Bank Plc.
Vee Network has over one million subscribers in
Nigeria or about 33 per cent of the market share.
Rival MTN has about 58 per cent of the market share
leaving M-Tel and Globacom to share the remaining
small percentage.
EWI is a Zimbabwean company registered in South Africa
 

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