Major Shareholder Signs Preliminary Agreement for Zain Sale to Etisalat

One of Zain’s major shareholders, the Kharafi Group, has signed a preliminary agreement to start the due diligence process for a deal to sell 46% of Zain to the U.A.E. incumbent operator Zain, Reuters News reports. The due diligence process is expected to take some six weeks to complete; however, it will provide a more accurate valuation for the deal. The National Investments Co (NIC), a Kharafi Group unit, released a statement on the Kuwaiti bourse: "We were informed by our client that Al Khair National and Emirates Telecommunications Co have signed an agreement, and the due diligence will start." At the end of September Etisalat submitted an offer of just under US$12 billion for a 46% share in Zain (see Middle East and North Africa: 30 September 2010: Etisalat Offers US$12 Bil. for 46% Stake in Zain). Since then it has received approval from the Kharafi Group (see Middle East and North Africa: 8 October 2010: Zain's Major Shareholders Approve Sale to Etisalat). The initial offer was for 1.7 dinars per share, equating to just under US$12 billion for the stake, which is actually a controlling position as 10% of its equity is in Treasury shares with no voting power. If the deal goes through it would give Etisalat significant exposure in the Middle East, and in Morocco and Sudan in North Africa. The U.A.E.-based operator has been interested in entering a few high-growth markets where Zain already has a presence.

Outlook and Implications

With the due diligence process now going ahead, a truer valuation will be achieved in about six weeks, making the closure of the deal possible by the start of next year.

• Zain Asset Growth Potential: Zain’s mobile operations have the largest mobile network coverage in the Middle East and it is present in key markets where Etisalat has also in the past had interest. In recent years Etisalat has also been interested in Iraq and tried to partner with one of the country’s smaller mobile operators, Korek; however, over two years on no deal has been announced. Zain is now the largest operator in Iraq and has witnessed the fastest growth in mobile take-up over the last few years. Zain has already invested US$5 billion into the country and since buying up Iraqna's assets at the end of 2007 has near national coverage. At the time of winning the licence Etisalat was also a strong contender, however it narrowly lost out. Another potentially high-growth market is Lebanon, where Zain has a management contract to provide mobile services but no actual licence. However, it will place it in a strong position to win a full licence when the auction goes ahead towards the end of this year or early next year. Mobile penetration in the country is still one of the lowest in the region.
• Etisalat's Increased Coverage: Etisalat’s purchase of a controlling stake in Zain will give Etisalat solid exposure in strong Middle Eastern markets; the operator has been seeking licences in the region over the last few years and has sought to move into Asia as Middle Eastern assets have been harder to get hold of. Etisalat currently provides services in 18 markets.
• Zain Saudi Arabia Conflict: One further sticking point to the deal concerns Zain’s Saudi mobile operations, which compete with Etisalat’s Mobily on both 2G and 3G services. Zain launched services in the country in August 2008, while its market share has steadily been increasing. ARPU figures have declined, resulting in poorer financial performance; there have been many interested bidders for Zain’s Saudi operations including Telecom Egypt, Batelco and new fixed-wireless operator in Saudi Arabia, Atheeb Group (see Egypt: 29 October 2010: Telecom Egypt CEO Denies Expansion Plans, Expresses Interest in Zain Saudi Arabia; Saudi Arabia: 5 October 2010: Batelco Expresses Interest in Zain Saudi Arabia; and Saudi Arabia: 26 October 2010: Atheeb Expresses Interest in Saudi Zain Assets). Both operators have also recently been expressing interest in Syria's third mobile licence; in the past they have been in a relatively strong position to acquire the licence, however they could now face strong competition from Russian operators who are also in a strong financial position to enter the market.