IHS Global Insight Perspective | |
Significance | The rejection of all three bids is putting Etisalat's 46% stake purchase of Zain in jeopardy. |
Implications | There are only a few operators in the region with the purchasing power to acquire Zain Saudi Arabia. With few potential buyers, the rejection of offers is likely due to shareholder concerns rather than the valuation of its Saudi operations, which were also recently enhanced. |
Outlook | In the current state, a deal between Zain and Etisalat is looking increasingly unlikely in the short term. |
Zain has declined all three offers made for its Saudi Arabian mobile operations, TradeArabia reports. The operator needs to sell off its Saudi Arabian unit for Etisalat to proceed with a deal to purchase a 46% stake in the operator, currently valued at just under USD12 billion (see Middle East and North Africa: 30 September 2010: Etisalat Offers US$12 Bil. for 46% Stake in Zain). Etisalat already competes with Zain in Saudi Arabia through Mobily, therefore Zain must sell off its operations there before Etisalat’s acquisition of Zain can go ahead. One of the bidders, Kingdom Holding, released a statement on the Saudi Bourse saying, "The board of Zain Kuwait did not provide Kingdom Holding with an answer with regard to the presented offer so the offer period expired without reaching any agreement."
In the last few months Zain received interest from five operators and investment institutions. MTN and Qtel were the first to express interest, and a further three players—Batelco, Kingdom Holding and Al Riyadh Group—have also placed bids. At the end of last week, Zain Saudi Arabia delayed its decision on the bids it received from two investment groups as it had also received enhancements to its offers from Kingdom Holding and Batelco (see Saudi Arabia: 17 February 2011: Zain Delays Decision on Bids for Saudi Arabian Operations After Offers Enhanced).
Outlook and Implications
Zain’s Saudi Arabian operation has been one of its most expensive purchases—it currently owns 25% of the unit, and paid USD6.1 billion for the licence in 2007. The operations launched in the latter half of 2008 and since then have experienced dwindling ARPU and intense competition from Mobily. This has resulted in the unit racking up mounting losses, estimated to be USD3.9 billion of debts, with buyers likely to take over any debt guarantees held by parent group Zain. Last year, it incurred a loss of USD629 million, compared to a shortfall of USD826.7 million in 2009.
- Other Deal Complications: For Etisalat to proceed with the stake purchase in Zain, it requires financing; however, the banks it has been in talks with have set a requirement that it must take management control of the operator. Etisalat will do this as 10% of Zain’s shares do not have voting rights. Minority shareholder Al-Fawares is interfering with this requirement as it does not want to sell its stake (4.5%) in the operator and disapproves of the deal since Etisalat did not submit a formal offer to go ahead with due diligence. Although it has sought legal action, which has recently been dismissed, it is very keen to hold onto its minority stake and could reattempt to disrupt the deal (see Kuwait: 24 December 2010: Kuwaiti Court Dismisses Zain's Minority-Shareholder Lawsuit over Etisalat Stake Purchase).
- Etisalat Stake Purchase Outlook: The rejection of the offers by Zain will make Etisalat’s purchase of Zain increasingly difficult, considering other complications to the deal. As such, in the current state a deal with Etisalat looks increasingly unlikely. Etisalat may consider other options, such as purchasing only specific units of Zain like its Iraqi operations—for the last few years Etisalat has attempted to enter Iraq through a deal with Korek or through new licence opportunities. Zain recently commented that it would seek other emerging market opportunities if a deal with Etisalat falls through (see Middle East and North Africa: 20 January 2011: Zain Considering Emerging Markets If Etisalat Deal Fails).