Why Telkom deal failed in Nigeria

2010-12-04 13:15

The announcement last week that Telkom was exiting the lucrative Nigerian telecoms market has once again highlighted the importance of doing one’s homework ­before entering foreign markets.

While South African companies such as cellphone operator MTN and Standard Bank have done remarkably well in Nigeria, Telkom’s ­failure in the West African economy has been attributed by analysts to its poor choice of acquisition target when it entered that market.

Analysts said that Telkom should not have bought Multi-Links, which uses code division multiple access (CDMA) technology, which is preferred in North America but nowhere else.

The most preferred technology around the world is the Global System for Mobile Communications (GSM), which reaches one billion people, compared with ­CDMA’s 270 million people.

Sisa Rafuza, a portfolio manager at Metropolitan Asset Managers, said: “Telkom went for a company with the wrong technology in a ­market that is 80% to 90% GSM. Companies like MTN that use GSM technology in the Nigerian market are capturing subscribers and making money, but ­Multi-Links is not getting enough subscribers.”

According to media reports last week, Telkom could spend as much as R1.3?billion to get out of Multi-Links. It spent R3.2?billion when it bought the unprofitable company. Telkom has written down the value of the Nigerian business by more than R5.6 billion.

Financial daily Business Report reported this week that Telkom was in talks with a Middle East ­telecoms operator to sell the ­cellphone division of Multi-Links to its Nigerian business.

But Telkom is not the only South ­African company that is mulling exiting or has abandoned an ­African market. Cellphone ­network operator Vodacom said last month that it might pull out of its Democratic Republic of the Congo (DRC) business if it fails to resolve a shareholder dispute with its DRC partner Congolese ­Wireless Networks (CWN) in the next six months.

In March this year, Media24, the publishing subsidiary of Africa’s biggest media company, Naspers, exited Kenya’s highly competitive publishing industry following a drop in revenues and a jump in ­operational costs in its Kenyan business, East Africa Magazines.

Vodacom and CWN are at each other’s throats over a $350-million (about R2.4?billion) loan which ­Vodacom ploughed ­into their joint-venture telecoms business, Vodacom Congo.

Vodacom wants the loan and the interest to be paid back. CWN is unhappy with the loan’s “uncommercial terms and conditions”, and is now balking at continuing to pay interest after having already forked out $180?million.

Thokoane Tsolo, head of the ­Africa unit at the Industrial Development Corporation, said South African companies wishing to ­enter markets across the continent must conduct proper research to avoid the pitfalls faced by Telkom and Vodacom.

“They need find out more about the markets and the partners they are going to deal with.

“You don’t make money overnight and therefore it is important to be patient,” said Tsolo.

His comments were echoed by Dave van Niekerk, the founder and former chief executive of pan-African microlender Blue ­Financial Services, who took the company to 14 African countries between 2001 and last year.

Van Niekerk said his experience was that it took longer to make money in the rest of Africa than in South Africa because of poor ­infrastructure and lack of skills.

“If you look at MTN when it ­entered Nigeria, at first it was not successful, but when the business eventually turned it made lots of money. Some guys want to give up when the profit is six months away,” said Van Niekerk.

He said potential investors must spend at least 18 months to two years researching their target ­markets before deciding to enter.

“If you take the wrong partner, you are probably going to end up fighting with it, resulting in ­regulators and politicians keeping a close eye on you. It is important to choose the right partner, but those relationships are often lost after a business has been bought,” he said.

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