Olaniwun Ajayi partner Ibiola Ogunbiyi discusses her work on the debt restructuring of Etisalat Nigeria, which now trades as 9Mobile, and the businesses sale with Laura Mendes

How did the firm win the mandate?

The firm had an existing relationship with the lender with respect to the restructuring of the underlying multi-currency credit facilities, which is why we were called on when the lenders wanted to enforce the security underpinning the credit facilities.

How did the deal evolve from a debt restructuring to the sale of the debtor?

It was quite complex. The original owners of Emerging Markets Telecommunications Services / 9Mobile had been in lengthy negotiations with the lenders on how to restructure the credit facilities, but terms could not be agreed and discussions were aborted. Subsequently, the company defaulted on its payment obligations under the credit facilities, which led to the occurrence of an event of default under the finance documents and ultimately the enforcement of the lenders’ security over the majority shares held in the company.

Advisors were appointed, a sale process was outlined and potential buyers were shortlisted. However it quickly became clear that potential buyers were concerned about the company’s high leverage and debt issues and that restructuring the credit facilities was going to be a key part of getting the shares sold in order to reassure potential buyers of the sustainability of the company post-sale. This is how the debt restructuring became a critical part of selling the shares.

Can you explain the structure of the deal? Was there anything unusual or complex about it?

The precise details of the structure are confidential but I can say that it involved the sale of the majority shareholding in the company and the credit facilities. The company had to be fully restructured to ensure it would be a going concern after the sale as it was in dire financial straits and was in need of relief from the overhanging debt to financial and trade creditors, and a fresh equity capital injection.

The company is the fourth largest mobile telecommunications network operator in Nigeria, and at the onset of the enforcement process by the lenders had a subscriber base of about 21 million and over 1000 workers across the country. It was therefore crucial to the lenders to avoid any adverse effect on the employees and subscribers and minimise loss of value by the company. It was quite the balancing act to develop a transaction structure that would preserve the company as a going concern, minimise further losses by the lenders, proceed with the enforcement and sale process, and deliver to the successful buyer a viable business.

One of the first issues that had to be quickly resolved by the lenders and our firm as their legal counsel, was taking effective control of the company. Notably, while the discussions between the former owners of the company and lenders were ongoing to either restructure the debt or resolve the payment default, all the directors of the company suddenly resigned. In order to avoid the company being without steerage and a further erosion of the value of the business, the lenders had to act swiftly over a weekend to exercise their powers to appoint directors to take control of the company. Shortly after take-over, the new management also had to design and launch the 9Mobile brand whilst negotiating terms under which the Etisalat brand would be phased-out.

Another level of complexity was the issue of legacy debt owed to trade vendors. With the change in control to lender appointees, and a sale to a third-party buyer imminent, the vendors to the company became very anxious over the settlement of significant legacy debts owed by the company and fees accruing daily from ongoing service to the company. Key vendors had on a number of occasions threatened to disconnect the company’s facilities and cease providing services to the company. The structure for the sale thus had to take due cognisance of the vendors’ interests and we had to find a balance between managing the interest of the lenders and the vendors, while making sure we still had a viable way to sell to a potential buyer.

There was some level of governmental interest in the sale given the size of the debt and the concerns around its potential to severely impair the balance sheets of the lenders as well as have systemic effect on the banking sector should the distressed debt remain unresolved. The fact the failure of the company could result in the loss of jobs, a stranded subscriber base, and loss of confidence in the Nigerian economy as a whole was also a concern. The oversight of the banking and the telecoms regulators therefore presented another level of complexity as the deal structure had to meet the requirements of these regulators.

Were negotiations for the deal contentious?

Negotiating and completing the deal was quite contentious given the different categories of stakeholder interests that had to be carefully managed as the deal progressed.

Notably, the preferred bidder for the acquisition financed the purchase by third-party credit. This meant we also had to negotiate with that third party financier about the terms of how the financing would be provided. There were issues around how to share security as the structure adopted entailed the lenders having some credit exposure to the preferred bidder for a period after the sale of the credit facilities. We had to carefully manage how the various layers of credit relationships among the lenders, preferred bidder, third-party financier and the company would work.

Another constraint was the investigation by the federal legislature into the process that led to the enforcement of security by the lenders, as part of a wider review on the effect of distressed debt on investment patterns and possible legislative reform. In particular the banking and telecommunications committees of the lower and upper houses of the National Assembly were concerned about the potentially adverse effect on the economy of the company’s failure. To this end they invited transaction advisers and the lenders on a number of occasions for lengthy sessions where facts and documents pertaining to the enforcement and sale process were examined and reviewed. We were required to keep these committees informed about all the steps that were being taken in terms and this also had an impact on transaction timelines and outcomes.

There were also court actions instituted by third-parties against the company and the lenders in the erroneous belief they had an economic interest in the shares over which the lenders had enforced, and also seeking to restrain the disposal of any asset of the company. The lenders were duly represented in these cases, some of which are ongoing.

In spite of these constraints, the deal closed in Q4 2018 and the company has since been handed over to the successful buyer.

Do you expect to see more consolidation in the telecoms sector in Nigeria in the near future?

When the lenders first took over the company my initial thinking was that maybe the company was mismanaged by the previous owners as it was unfathomable how billions of dollars equity and debt capital appeared to have gone down the proverbial rabbit hole, with no commensurate increase in asset and shareholder value. Interestingly, however, no material indication of financial mismanagement was uncovered.

My understanding from my experience on the deal is that scale is critical to the success of any mobile telecommunications operator. Being a late entrant into an established telecommunications market inhibits any operator’s ability to acquire the kind of scale and deploy the quantum of capital necessary to overcome the infrastructure and market challenges of an emerging economy. Taking this into account I think consolidation of the market is inevitable. We may yet see the emergence of no more than two, possibly three, major mobile network operators in the long term.

Looking at the Nigerian market more generally in terms of the type of deals you have seen in the last 12 months, what have been the main trends?

There has been some M&A work and debt capital raising in local and foreign capital markets. Infrastructure development projects have been few in number, especially in the power sector given a number of niggling industry issues which are yet to be resolved.

As would be expected, the run-up to the recently concluded general elections witnessed a slow-down in commercial activity as people watched to see how the outcome of elections will impact governmental policy and focus before making further investment decisions. Now that the elections are over we expect the pace of economic activity to pick up gradually, though the pre-election slow-down may linger until Q2 when the successful government will have settled in. Even though there has been no change in baton at the federal level, the expectation is that there will be a fresh perspective and new economic strategies for the country which will incentivise investments.

What sectors do you expect to be the most active in 2019?

We are expecting significant developments in infrastructure, energy and agriculture - these are areas that the government has shown a lot of enthusiasm about promoting and developing, especially because these sectors provide stimulus for economic growth in other areas.