Kingdom Holding and Batelco Make Joint Offer on Zain Saudi Arabia for USD950 Mil.

Zain has provisionally accepted an offer of USD950 million for its 25% stake in Zain Saudi Arabia from Kingdom Holding controlled by Saudi Prince Alwaleed bin Talal, and Bahrain Telecommunications (Batelco) the incumbent operator of Bahrain the Financial Times reports. Last month Zain declined offers from both Kingdom Holding and Batelco, as well as Al Riyadh Group, which were deemed too low at around USD750 million. The offer does not include USD3.8 billion of debt the Saudi Arabian mobile operations have accumulated.

At around the same time the previous offers were made, Etisalat missed its deadline to complete the due diligence of Zain's other assets which put an end to the deal for Etisalat to buy a 46% stake in Zain for USD12 billion.

Outlook and Implications

The major implication of the sale is that it paves the way for Etisalat to try and re-establish a deal with Zain to buy a 46% controlling stake in the operator. This was a major hurdle against Etisalat buying a stake in the operator, as it competes with Zain in Saudi Arabia through its subsidiary, Mobily. If the Etisalat-Zain deal does go through, it will give it access to another seven Middle East and North Africa (MENA) markets, which are key to ensuring Etisalat remains a major operator in the MENA region. Etisalat is still very interested in the stake in Zain, and has now completed due diligence of the operator and claims it is in the process of analysing data (see Middle East and North Africa: 3 March 2011: Etisalat Maintains Interest in Zain Stake Purchase).

Whilst Kingdom Holding and Batelco added another USD200 million to previous offers, the opportunity gives it strategic access to one of the most important markets in the Middle East. Saudi Arabia has a population of around 26 million, the third highest after Egypt and Iran, as well as one of the highest GDP levels in the MENA region. The country boasts continued strong economic growth, which will enable new operators to acquire a higher ARPU generating customer.

• Zain Saudi Arabia Performance: Earlier this month Zain announced its 2010 financial results, with a major rise in profits attributed to the sale of its sub-Saharan mobile assets. Zain Saudi Arabia's operational performance was announced just after it rejected the bids from Batelco and Kingdom Holding, when it reported the highest subscriber growth of 317%, now possessing some 8.4 million customers. Zain Saudi Arabia suffers from a poor debt position which has deterred interest from other investors in the region. Zain paid USD6.1 billion for the Saudi Arabian licence and only now is making some progress in the market. Its major threat is, Etisalat which held almost a 50% market share prior to the entrance of Zain towards the end of 2008.

• Other Hurdles to the Etisalat-Zain Deal: 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 with the 46% it is looking for, as 10% of Zain's shares do not have voting rights. More recently, however, the banks have said that if Etisalat wants to continue with the Zain deal, the price of financing will increase (see Middle East and North Africa: 8 March 2011: Etisalat's Future Opportunities for Zain Stake Could Come at a Higher Price). 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 legal action has recently been dismissed, Al-Fawares is still very keen to hold onto its minority stake, and could yet attempt to disrupt the deal once more (see Kuwait: 24 December 2010: Kuwaiti Court Dismisses Zain's Minority-Shareholder Lawsuit over Etisalat Stake Purchase).