Perhaps, one of the most defining developments in global data privacy enforcement, which also speaks to how increasingly important data privacy compliance issues will be for private equity investors, is the recent announcement by the ICO (UK’s data privacy regulator) of its intention to impose a fine of up to £99 million under the European Union’s General Data Protection Regulation (GDPR) on strategic investor, Marriott International Inc., in respect of a data breach that previously occurred in recently acquired Starwood Hotels, which was acquired by Marriott in 2016 for circa USD 13 billion.
It did not matter that the said data breach occurred in 2014, two years before the acquisition of Starwood Hotels was consummated by Marriot. It was reported that personal information (including credit card details, passport numbers and dates of birth) contained in approximately 339 million guest records globally were exposed by a cybersecurity incident in 2014, of which around 30 million related to residents of 31 countries in the European Economic Area.
Amongst others, the ICO reached a decision that:
(a) Marriott failed to undertake sufficient due diligence when it bought Starwood; and
(b) Marriot should also have done more to secure its systems after the acquisition.
The statement credited to Information Commissioner Elizabeth Denham is instructive:
“The GDPR makes it clear that organizations must be accountable for the personal data they hold. This can include carrying out proper due diligence when making a corporate acquisition, and putting in place proper accountability measures to assess not only what personal data has been acquired, but also how it is protected.”
Some, if not the highest regulatory fines globally, have been imposed by data privacy regulators. For instance, Equifax will pay up to $700 million in fines and monetary relief to consumers over a 2017 data breach.
We sense that regulators across board will follow this regulatory trend, in view of its potential for revenue. This is not to say that the reason data privacy regulators impose fines is to drive internal revenue, but that data privacy breaches & non-compliance is increasingly a compliance flashpoint and one of the easiest ways for a business to get a huge dent to its balance sheet. With the new Data Privacy Regulations 2019 issued by Nigeria’s data privacy regulator, the (NITDA), private equity fund managers and investors doing deals in Nigeria will need to give greater consideration[i] to data privacy issues, both at the fund level and portfolio company level.
Based on our reflections on a recent engagement, here are some key compliance and risk considerations to put in focus:
Based on a review of the NDPR and its Implementation Guidelines, our view is that NITDA’s approach to driving data privacy compliance is relatively friendly. However, we cannot yet tell which trajectory, regulatory enforcement of data breaches in Nigeria, will take, from a penalty imposition standpoint. The closest reference point here really is the global trend towards the imposition of significant fines on data controllers and data processors who are found to be in breach of data privacy regulations. Without a doubt, it would be prudent for private equity investors to design, investigate and implement, as the case may be, a data privacy compliance strategy in advance.
Portfolio companies and fund manager entities who are found to be in breach of Nigeria’s Data Privacy Regulations (NDPR) are liable to pay up to 2% of annual gross revenue. However, the financial exposure for data privacy breaches may be more than 2% because, the NDPR does not prohibit data subjects from seeking additional monetary damages in Nigerian courts, as a constitutional matter, from data controllers, that are portfolio companies or fund managers.
Before the announcement of the NDPR in January 2019, data privacy due diligence, understandably, did not form part of the traditional legal due diligence approach of transaction counsel in Nigeria. With regulatory developments in this area, it’s now more important to conduct data privacy due diligence as part of legal due diligence. Although a type of legal due diligence, data privacy diligence should ideally be carried out separate from the legal due diligence, preferably by co-counsel.
Private equity fund investors doing deals in Nigeria will need to carry out diligence on their existing portfolio companies and drive management decisions towards investing in data protection systems and relevant technology. Weighed against the potential risks, it’s not going to be too late, to conduct a data privacy due diligence. Accordingly, it would not be unreasonable for private equity investors, who may have closed a deal after the announcement of the NDPR, but omitted to conduct a data privacy diligence, to still conduct a data privacy diligence post-closing.
Private equity investors (and strategic investors) will need to review the contractual protections in investment agreements, to determine the extent to which the existing representations and warranty framework, protects their investments from the regulatory risk that may occur from a breach of data privacy regulations. It may be strategic for private equity investors to be more specific in their strategy here – for instance, the onset of a fine may be structured to trigger a revaluation or a pricing adjustment, which may also trigger other protective/restorative shareholder rights or share issuances.
Privacy equity investors who carry out data privacy diligence, at entry, may be able to leverage the results of such diligence to gain some pricing/valuation advantages.
Similar with legal due diligence, the target should ideally pay for or bear some of the costs for conducting a data privacy due diligence.
Private equity investors, who conduct data privacy due diligence, will be better able to structure and hedge related data privacy compliance risk at the portfolio company level.
At the fund manager level, like any business that handles customer and market-sensitive data, private equity funds are susceptible to data breaches that can cause exposure of customer information and valuable know-how or even trade secrets. In addition to ensuring full data privacy compliance for fund manager entities or corporate investment advisers incorporated locally, fund managers should consider communicating the legal requirements of data privacy compliance to its employees in a clear and consistent manner, during on-boarding and from time to time, through internal data privacy control and policy documentation. Data privacy compliance should be a key function of portfolio management and should be sustained till exit through holding period; and
Nigerian venture capital investors with direct investments in US-domiciled operating HoldCos which also have Nigerian operations will need to ensure compliance with US data privacy laws. Similarly, private equity investors with a pan-African investment thesis/portfolio would need to put in place a more holistic data compliance strategy that addresses data privacy compliance risk on a jurisdictional basis. As of the date of this update, up to 40% of African countries now have data privacy regulations.
Limited Partners/Non-Managing Shareholders typically reserve the rights to generally remove a General Partner for Cause in definitive agreements like the Limited Partnership Agreement or Shareholder Agreement. “Cause” is usually defined in reference as the actions or inactions of a General Partner that constitutes bad faith, fraud, gross negligence, wilful misconduct, a violation of securities laws, breach of fiduciary duty, or a material breach that has a material adverse effect on the business of the investment activities of the GP/Managing Shareholder. On this basis, GPs & fund manager entities alike have a general duty to investigate and understand every risk scenario and put in place structures to avert or mitigate such risks.
Analysis: Total Nigeria needs a financial overhaul
Total Nigeria’s Q1’20 results are a testament that some might have it worse than others as it recorded a revenue drop of 9.3% to N70.2 billion
The Oil Industry has had a particularly tough year, owing primarily to the novel pandemic. The International Energy Agency (IEA) predicts that the global oil demand is expected to further decline this year as Covid-19 spreads around the world, constraining travel as well as other economic activities.
Organizations like Total depending on international trade will be forced to scale down operations until restrictions ease off. However, Total Nigeria’s Q1’20 results are a testament that some might have it worse than others.
The period recorded a revenue drop of 9.3% to N70.2 billion in the first quarter of this year compared to Q1 2019. Total earns its revenue from three main sectors namely: Networks, General Trade, and Aviation. Revenue from Aviation fell by 39.5%. The decline in Networks is attributed to the reduced demand as a result of the enforced lockdown and restriction on travel across the nation.
Yet, it is clear that the company had its own challenges pre-COVID-19. In the quarter, it attained a loss after tax of N163 million which was 65.6% better than the loss after tax of the comparative quarter; it is overwhelmed by a myriad of distinct issues.
First off, its revenue has experienced a steady fall over the years; reasons for this is tied largely to its lack of importation of petroleum products.
It is also burdened by inefficiencies in its operations evident in its high operational and direct expenses, as well as its high debt over the past years. The company has carried on huge loans and borrowings in its books: N40.6 billion in 2019 and only a marginal reduction of N2.2 billion in the current year.
Even higher are its expenses after an 8.38% reduction in the just-released results, it arrived at N69.7 billion for Q1 2020. Amongst its high operational expenses is the high and increasing technical fees it pays to its parent company. From N251 million in the first quarter of last year, it incurred around N700m in the year under review. It also has cash flow issues with about N22b in negative cash and cash equivalents. In its 2019 report, it revealed that the year had been tough with its cost of doing business rising exponentially as evident in its interest expense, 395% higher than the previous year as a result of repayment for products and a high level of borrowing.
The company, in its last full year annual report, noted that to make significant savings to both operational and capital expenditure costs, a series of initiatives relating to cost efficiency, process optimization, and significant reduction of working capital requirement and finance costs, were put in place and are in motion for this year.
As Dr. Fatih Birol, IEA’s Executive Director put it “The coronavirus crisis is affecting a wide range of energy markets – including coal, gas, and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand transport fuels.”
However, Total’s position goes beyond the impact of the pandemic. Its rebound rests on its ability to carry on with cost control and lower debt commitments, together with the speed of the containment of the virus. That said, the company might need to raise capital soon while also coming up with formidable strategies to strengthen its business model.
Merger, Tax incentive boosts BUA Cement FY 2019 result
BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
(READ MORE:Dangote Cement to access more debt funding)
BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.