As Investors Eye AMCON-managed Airlines…

Last week, there were reports that investors were interested in investing in the airlines which the Assets Management Corporation of Nigeria (AMCON) took over, particularly Nigeria’s biggest carrier, Arik Air. Chinedu Eze examines the issues leading to the takeover of the airline by AMCON and the implications of its possible sale

Minister of Finance, Mrs. Kemi Adeosun, disclosed during a recent interview with journalists in Washington D.C. that some private equity investors were seriously considering investing in Arik Air and Aero Contractors, two distressed local airlines that had been taken over by the Asset Management Corporation of Nigeria. Adeosun said this at the International Monetary Fund/World Bank Spring Meetings.

According to her, “It was a preliminary discussion. They just expressed interest in buying the airlines and we told them that we would look into it. Most of them are interested in investing in Nigeria and they just want to be sure that the timing is right. Some are looking at buying one of the airlines with AMCON and just waiting to be sure that our policies are right.”

Earlier investigations by THISDAY had revealed that the federal government intended to sell Arik Air through AMCON. And at various press conferences, AMCON has justified the takeover of the airline by government and its possible sale, explaining that Arik’s debt exposure is higher than its assets. But this argument has been faulted by facts from Deloitte UK’s evaluation of the assets of Arik Air.

 

AMCON’s Claim 

In justifying the takeover of Arik Air, AMCON says the airline has negative capital that runs into billions of naira. New claims on the airline’s precarious financial state have continued to emerge.

In an affidavit filed at the Federal High Court, Lagos, by Vice President and Team Leader, Transport and Aviation Unit of Arik Air, Mr. Gbolahan Odutayo, on behalf of AMCON, and the receiver/manager, Mr. Oluseye Opasanya (SAN), the plaintiff, averred that the magnitude of Arik’s financial problem was much worse than anticipated. Also spokesman of AMCON, Jude Nwauzor, when contacted by THISDAY said the commission had been spending money on the running cost of the two airlines, Aero and Arik, noting that the debt exposure of the airlines over strip the worth of their assets.

“We are spending money on running cost. If anybody offers us good money we will sell them. If Arik sells all its assets they cannot get our money. AMCON just did an intervention. It is not staying there in perpetuity, so we want to move but I want to assure you that this government will not do anything illegal,” Nwauzor said.

AMCON has been changing the figures of the debts owed by Arik Air. At the last count, the corporation said the total debts owed by the airline was about N300 billion. But the airline insisted that it owed AMCON N90 billion and banks, N39 billion.

 

Issues in Arik Air’s Sale 

Judging by the minister’s interview, it is obvious that the federal government is contemplating selling Arik Air. But many sources have told THISDAY that this would be legally difficult to do without the consent of the shareholders. They note that without the shareholders’ consent, the government can only achieve the sale by fiat, a situation that could mean more disincentive for foreign direct investment. Many believe that if government is to follow the law and due process, it must seek the approval of the shareholders of Arik Air, who must endorse the plan before the airline is sold.

A source told THISDAY, “Government cannot sell the airline because it does not own the shares. Government and its agencies can strip the company of its assets but it cannot sell the company. This is because selling a company means selling that company’s shares. So the only option for government is to expropriate; that is, to forcefully take over the airline, an act, which is now unconstitutional and illegal. The second option is that government can negotiate with the shareholders. While the first option is illegal, the second option is reaching amicable agreement with the shareholders.”

The source said the former management of Arik Air was not averse to selling its shares to the public, explaining that it was in the process of going public before the airline was taken over by AMCON.

 

 Debts 

While AMCON said Arik Air owed debts amounting to over N300 billion, a source close to the former management of the airline said the debts were mischievously overstated, “for the purpose of selling the airline off as a scrap or liquidating it.”

According to the source, “If government were to set up a mechanism and determine the actual debt of the company, the shareholders would not have any issues with any third party shareholders because we all agreed that there was need for more investment in the company because aviation business is capital intensive but profitable.

“Although AMCON is touting various figures, the airline’s debt to the corporation is not more than N90 billion. They should concentrate on the debts of Arik and not the companies its chairman has interest in. Arik owes banks N39 billion and these loans were performing before the company was taken over by AMCON. You can verify this with the banks, Arik was servicing these loans with N400 million every week before its takeover.”

An industry source said that the drastic fall in the exchange rate of the naira in 2016 critically affected many companies in Nigeria and not just Arik Air or the aviation industry, “and government is expected, as it is done in other countries under such economic situation, to help these companies to survive and not to further kill them by taking them over in order to meet some vested interests.”

 

CBN Rule 

THISDAY learnt that AMCON came to Arik because the Central Bank of Nigeria, as part of the response to the global economic crisis then, made a rule that no company should have debts in a bank that was up to 10 per cent of the bank’s total debt.

A consultant who preferred anonymity said, “This affected the economic sectors that are highly capital intensive, like aviation, oil and gas and power sectors. For example, to buy three new aircraft you need about $200 million, but to buy 10 big luxurious buses for road transport you may need N500 million. It was unfortunate that the policy did not segregate the sectors.

“So the implication is that when a company is exposed to up to 10 per cent of a bank’s total debts, no credit facility could be extended to that company. These companies, including Arik, became blacklisted from financial institutions and this impacted on the cash flow and funding of the daily running cost, including purchase of fuel for operations.”

A source close to the former management of Arik Air told THISDAY that there were many allegations instigated by AMCON to damage the image of the management of the airline before Nigerians. He said there was no room for diversion of funds because all the monies secured by the company went through Nigerian banks, as all the aircraft acquired were financed through these banks.

“For example,” the source explained, “Zenith Bank is owed by Arik but it is not complaining; the same thing with the other banks because every money you pay for ticket goes through these banks. As you pay for your ticket, the personnel beside the person giving the ticket is a bank staff who collects the money. So everyday each bank collects Arik Air’s revenues and shares them between the bank and the airline and in this way the banks’ debts were being serviced by the airline.”

He added, “Arik was funded by international finance institutions, including US-Exim Bank, Export Development Company (EDC) of Canada, and Afrexim bank (African Export–Import Bank). These are international institutions that cannot compromise standards. Arik has completed the loan ($750 million) repayment to US-EXIM Bank and owes Afrexim $24 million, EDC, $48 million, bringing it to a total of $72 million. The final date for the repayment of these debts is 2020.”

 

Arik’s Worth

 The sourced said, “Arik was valued by Deloitte UK to be worth $3.2 billion, which is about N776 billion. When you look at the debt to asset ratio, the money owed AMCON is less than 10 per cent of the assets and the total debts owed by the airline is not up to 20 per cent of the airline. But even if the debts are up to 30 per cent of its assets, the airline is still in a very healthy state. The airline remains one of the most profitable companies in the world. This is a fact, which Nigerians do not know because so many things have been distorted, and the airline could have continued to service its credit facilities if it was not taken over by AMCON. It would have secured operating funds and continued in business. If you look at the international financiers backing Arik, you will realise that it is a formidable blue chip company. This is what Nigerians do not understand.”

 

Motive 

THISDAY investigations also revealed that when President Mohammadu Buhari took over he was enthusiastically disposed to the national carrier project, and there was a policy direction towards a national carrier. The government later set up a committee to look at the cost implication of establishing a national carrier vis-à-vis the dwindling government revenues. It was in response to what the committee came up with that the president indicated that the national carrier project should be kept in abeyance. But those in the committee seemed to have other ideas.

The federal government still insists that it has three programmes to revitalise the aviation industry. They include establishing a national carrier; establishing maintenance, repair and overhaul (MRO) facility; and the concession of the nation’s airports.

An informed source told THISDAY, “The actors in the committee wanted to achieve the national carrier project through the back door by exploiting the weakness of Arik Air, including its debt exposure to AMCON, to legitimise its sinister plan to expropriate the airline. Part of actualising this plan was to damage the image of the airline before Nigerians by instigating the unions and the aviation agencies to disrupt its operation and this came to a head during the period of aviation fuel scarcity and also during the Yuletide when demand for flights was very high.”

But whatever happens, it has to be noted that Arik as a business concern in Nigeria is at the mercy of government. So either by impunity or through legal and standard process, the government can take over or sell the airline. But if the federal government forcefully sells the airline it will be a bad signal to both Nigerian and foreign investors. It would put a question mark over the ability of the government to guarantee the security of any business in Nigeria it has developed interest in.