Zain strategy reversal in focus as M&A talk swirls
Kuwait, August 12, 2009
Kuwaiti telecom group Zain's possible sale of a stake in its African unit will please cash-hungry shareholders and reverses a strategy of global growth in favour of focusing on Middle Eastern markets.
As market talk swirls that an extraordinary shareholder meeting on August 31 will open the way for a rival to buy a stake in Zain, analysts are busy dissecting the sudden change in strategy at the group.
A regional powerhouse known for its aggressive expansion, Zain has said it is unaware of stake sale talks reported by local media but this did not stop its shares surging nearly eight per cent on Tuesday.
Zain has spent billions of dollars abroad as competition heated up at home - pouring more than $12 billion into Africa alone since 2005 - aiming to be a top-10 global player by 2011.
'The African operations are the major contribution to the revenues and subscriber base,' said Jithesh Gopi, head of research at Bahrain-based Sico Investments.
'But as far as net profit ... they have not been a contributor to the group.'
Africa represents about 62 per cent of Zain's 64.7 million customers but only 15 per cent of the group's net profit, as of end-March. Seven out of 16 African operations made a first-quarter net loss, compared with only Saudi Arabia of its six operations in the Middle East.
Cutting their losses and reducing overheads by recouping $12 billion for the stake is attractive. Key shareholders - sovereign wealth fund Kuwait Investment Authority and Kuwaiti family-owned conglomerate Kharafi group - could be tempted as they look to boost returns during the tough economic times.
'If there is little further growth expected and you can get a good price, why not?' said Shardul Shrimani, analyst at research firm IHS Global Insight, adding that Zain had reached a point where it was 'time to restructure and minimise overhead'.
Talks with French media group Vivendi collapsed in July, but Zain left the door open to sell a stake in its African unit, excluding Morocco and Sudan.
Investment bank UBS is due to complete a review of Zain's assets this month.
'It's going to be a company that's refocused on the Middle East with a series of very strong franchises,' said Simon Simonian, a telecom sector analyst at Dubai-based Shuaa Capital.
Were Zain to exit Africa, its growth plans would be downgraded as market saturation in the Middle East and Southeast Asia and pricey assets in India hinder aggressive expansion. New licences in the Middle East are few, leaving Zain primarily to focus on using technology to upgrade existing networks.
'They (Zain) are working on implementing their 'One Network' strategy and investing heavily in 3G networks,' IHS Global Insight's Shrimani said, pointing to Iraq, one of Zain's fastest growing markets. But regional growth hangs in the balance.
Penetration is low in Iraq compared to elsewhere in the region, but obstacles remain. Operators face security issues, equipment is still stolen and electricity is often disrupted. The Iraqi government also plans to sell a fourth licence.
In Saudi Arabia, Zain, the third entrant with Saudi Telecom and Etihad Etisalat, has managed to grab an 11 per cent market share in less than a year, but it also posted losses of about $1 billion as competition in the Arab world's largest economy hots up.
Iran arguably has the most potential. Mobile penetration is less than 60 per cent and about half of its 70 million population is under 25 years of age.
'Zain will need to review its goals and objectives that they have set before for revenues, Ebitda and number of subscribers,' said Shuaa's Simonian. In July, it reaffirmed its target of $6 billion in earnings before interest, tax, depreciation and amortisation (Ebitda) and 160 million<