The GT-Vodafone Mess: Back to Basics

Tuesday, November 03, 2009 

It is sad the turn the protracted GT-Vodafone issue appears now to be taking.

Vodafone has already had to write down the value of the investment by more than $400 million, and with all the uncertainty surrounding the future prospects of the new entity, there is every potential for further financial instability at the former state-owned telecoms operator.

It makes you wonder how the new board and management are coping, as they cling tightly, perhaps overoptimistically, to the prospect of mobile number portability and other supposedly competition-inducing regulations. Meanwhile the fortnight promised by the Honourable Minister of Communications for the declamation of government’s position is upon us. One cant almost help feeling sorry for the young company.

How did the entry of the world’s largest telecommunications player into our market – in most ordinary circumstances a cause for celebration – suddenly become a basis for scandal, allegations of corporate immorality, and political intrigue?

When you look at the case of the opponents of the GT-Vodafone deal, the underlying accusation goes something like this. The Kuffuor Administration having begun the rudiments of complying with the laws of the land concerning the divestment of state interests in national assets, and having appointed transaction advisors to guide the process, grew tired of the whole affair in the middle, and dispensed with what was to them an inconvenience to pursue objectives outside the national interest of Ghana. At this point the narrative splits into several competing alternatives, some plausible, some self-serving and others plain absurd.

The indisputable facts are that the Kuffuor administration did indeed authorise the divestiture of Vodafone, ostensibly to stem the company’s tide of debt, while cushioning the country’s current account balance as a convenient side-effect. It is also true that of the 17 firms that expressed an interest in buying two-thirds of Ghana Telecom, some of whom – like Bharti Airtel, Reliance Communications, and SingTel – were among the emerging world’s leading players in the industry, six were eventually shortlisted (pre-qualified) to present formal bids. Three of these eventually withdrew, leaving three “finalists”. These finalists then presented various offers all shy of $800 million. It is also probably safe to deduce that by the time the transaction advisor had presented their expert opinions on the three finalists’ propositions, the Kuffuor Administration had already concluded that the process was not yielding outcomes they could consider satisfactory. This is because evidence exists to show that the President had already begun a series of increasingly serious meetings with senior Vodafone executives, including the then CEO himself, Arun Sarin.

The most hostile of the critics of the Vodafone deal have interpreted these facts to suggest wrongdoing, mainly because eventually Vodafone made an offer that was determined by the Kuffuor Administration, without “independent advice”, to be sufficiently acceptable for laying before parliament, where using superior numbers rather than sound argument the administration managed to compel its ratification. The motivations of the Administration at this point are construed to range from petty corruption (a la P.C. Appiah Ofori) to grand larceny.

To buttress this thin evidence, the facts are emphasised that, firstly, there was an indication of a financially superior Telkom SA bid at the time the Vodafone discussions were ongoing; secondly, that Vodafone (as “Vodafone Group Services”) had already been declared ineligible during pre-qualification; and, thirdly, that the terms appeared to have been arbitrarily improved in favour of Vodafone, through an increase in equity offering and the inclusion of additional assets (notably the Voltacom fibre-optic infrastructure and associated privileges).

It will be obvious to everyone apart from the clearly prejudiced that none of the above facts suffice to prove corruption. The defenders of the Kuffuor Administration argue that once a fully advertised bidding process had concluded, government had satisfied its legal obligations and could, based on the insight garnered through that process, proceed to obtain superior results in the market. They argue that the additional assets and equity, properly valuated, do not detract from Vodafone’s $900 million offer. When confronted with the confusion surrounding the interchanging of “Vodafone Plc/Vodafone Group Services” and “Vodafone International BV” at different points of the consummation process, they dispel it by reminding observers that Vodafone International BV is wholly owned by Vodafone Plc, through a Luxembourg-registered entity, and that the use of intermediary entities is a standard tax-management and risk-mitigation strategy for international mergers and acquisitions used by most multinationals. The test for corruption in such circumstances would be quite hard to muster.

But what about “administrative justice” and “due process”?

There is no doubt that the role of the Divestiture Implementation Committee had been peripheral in the whole process, leading to suggestions of the Divestiture Act having been breached. There is also a worrying grey area surrounding the reopening of the Vodafone bid. Given that the terms were changed for Vodafone, shouldn’t that have merited brand new competitive tendering during which other bids, beyond Telkom’s, could have been reassessed on technical and financial grounds? After all, if Vodafone and Telkom could improve upon their bids, surely the others could have done so too, given the opportunity? Also, as the contract of the transaction advisors had been terminated at this stage, and the DIC seems not to have been fully engaged, what is the guarantee that the government was in a position to extract the maximum offer from Vodafone or to accurately disqualify Telkom SA’s expression of interest on technical grounds?

On the face of the evidence available, it is hard to come to any hard conclusions about most aspects of the GT-Vodafone deal, much less to offer suggestions about possible rectification of shortcomings, if any. “This” however is the real problem. A critical look appears to suggest that those who have been most vociferous about the Vodafone deal have also been the guiltiest of incomplete analysis, contributing copiously by their inactions to the many gaps in the evidence.

Why did two companies that were ruled out during pre-qualification end up in a bidding war for Ghana Telecom? What about the original process fail to convince participants to offer more compelling propositions? Why are the Transaction Advisors refusing to hand over all the documents pertaining to the transaction? Why did the opponents of the Vodafone-GT deal not commission an independent valuation?

Throughout this longwinding debate, from the street protests all the way to the recent committee review of the transaction, little in the way of detailed, original, analysis has been offered to ascertain the most fundamental matter of all: did Ghana get value for money or not?

The standard carrier metrics for determining these things in the telecom industry include “Average Revenue per User”, “Cell Tower Economics”, “churn”, “Subs”, and “Enterprise Value per Subscriber (EVS)” among others. Very few of the protagonists in this saga have bothered to even engage in a debate about whether based on these benchmarks, the GT-Vodafone deal was sub-optimal in light of international practice (if you use the EVS figure prevalent in South Asia for instance, GT was overvalued by Vodafone).

The intrinsic valuation of Ghana Telecom as a going concern has been avoided like a plague. Despite all the disputation, no one appears willing to do the hard work of re-evaluating the original prospectus that put GT up for sale, weighing up the methodology of the Transaction Advisors regarding the eligibility of offers, and performing the necessary fundamental analysis of GT’s commercial worth during the transaction window. This is despite the fact that the lessons learnt through such a process would be at least as enlightening as the raging furore about the fine points of political conduct.

The point above is crucial in the wider concern about whether political bickering and paranoia about corruption blinds us in this country to half-hearted work in many quarters beyond the political. Take the case about the Divestiture Act for instance. Why did the officials of the DIC not officially protest when it appeared that their role was being usurped by the Transaction Advisors? Are they not the experts in that legislation? Given their acquiescence in how things unfolded, especially by signing the deed of share transfer from the Ministry of Finance’s surrogacy to Vodafone International BV, can we seriously hope to clear the confusion about whether the Act was breached or not? Did the National Communications Authority (NCA) protest about any breaches of guidelines? Who from that supposedly independent commission would testify to that effect should it become necessary? What about the Technical Advisors at the Ministry of Finance and Communications who participated in this venture?

The aim of this brief article is not to excuse any politicians accused of graft but to expose the roots of the confusion that is at this stage clouding Ghana’s prospects as an investment destination.

The system doesn’t only run on the goodwill of politicians. To run well it needs to be fuelled by conscientious and diligent leadership at all levels. Furthermore, accountability and probity does not result merely from good intentions. Like public administration and policy execution, these civil virtues too must be exercised with strict meticulousness and a commitment not to leave any stone unturned.

When we look at the preparatory work Vodafone did in executing the Ghana dimension of its emerging markets expansion strategy, and compare it to what Ghana did during the period and has done since then, we feel some unease. For the contrast in thoroughness is clear and worryingly so.

This is the lesson the Vodafone saga ought to leave for us: half-measures in pursuing excellence will only get us mediocre results, passionate exhortations to the former notwithstanding.

Franklin Cudjoe (with Bright B. Simons reporting) IMANI – Ghana &