Batelco and Viva Received Notices by Bahrain’s T.R.A.

 

September 16, 2011

On Monday, September 5, 2011 the Telecom Regulatory Authority of the Kingdom of Bahrain (T.R.A.) said that it had issued notice to the Bahrain Telecommunication Company (Batelco) and the Saudi Telecom Company of Bahrain (Viva). This notice followed the implementation by the two companies of anticompetitive prices for international calls. For the T.R.A., these prices harmed consumers' interest. The third Bahraini mobile operator, Zain Bahrain did not receive any notice. Batelco and Viva compete in the market for international calls with Zain Bahrain and more than a dozen of other companies selling prepaid cards.

The T.R.A. said that it had concluded investigations about some complaints received from a group of licensed operators. The complaints affirmed that Batelco and Viva had launched anticompetitive pricing for mobile-originated calls towards Bahrain’s Zone 2 of the international calls market. Of the four international calls regions, Zone 2 is by far the most lucrative because it comprises Bangladesh, Sri Lanka, the Philippines, Pakistan and India. The reason is quite simple: According to Bahrain Census in 2010 the population accounted for 1.234 million of which 54 percent (666,172) was made up of non-nationals coming mainly from South Asia (in 2008 there were 290,000 Indian nationals, the largest expatriate group in the country).

The table above and the picture below give a very clear idea of the different relevance of the four international calls zones for Bahrain’s telecom operators.

The latest available data from the T.R.A. cover the period from 2005 to 2009, but given the nationalities of non-nationals in Bahrain, it’s quite probable that the trend has been the same also for the following years. And, as a matter of fact, during the considered timeframe, Zone 2 had experienced an 86 percent C.A.G.R., that was by far more than the double of the second best minute-consuming zone, which is Zone 4.

According to T.R.A.’s estimates in 2009 the overall value of telecommunications revenues was 338 billion Bahraini dinars ($896.7 million at the September 2009’s exchange rate) — of which more than one quarter was linked to international calls (26.1 percent) — for an approximate value of 88.218 million Bahraini dinars ($260.24 million). Within the international calls markets, the lion’s share of the consumed minutes comes from Zone 2.

On August 23, 2011, under the Bahrain’s Telecommunications Law, the T.R.A. issued notices to Batelco and Viva. For the T.R.A., the two operators’ conduct engendered an abuse of dominance in the international mobile telecoms market not guaranteeing a competitive level playing field as it’s instead requested by the Bahrain’s Telecommunications Law.

The T.R.A. is scared that this pricing policy could really wipe out a free and fair telecom market and it opposes any reduction of the competition level in the telecommunications market.  Following the Telecommunications Law, when the T.R.A. detects anticompetitive practices it has to step in to protect consumers’ interest with the preservation of a fair and competitive market. Now, before issuing its final decision, the T.R.A. is waiting for Batelco's and Viva’s replies to the notices. Abdulelah Abdulla, the T.R.A. spokesman, said that the two companies had until October 13 to respond to the T.R.A. notice. If the complaint is upheld the two telecom operators will probable face some fines.

Immediately, on September 6, the two companies released a communiqué commenting the notice. “We look forward to the opportunity to outline our case to the T.R.A. and we are confident we will receive a fair hearing” affirmed Rashid Abdulla, Batelco’s C.E.O. in an emailed statement. Viva’s declaration acknowledged that "Viva Bahrain is collaborating with Bahrain’s T.R.A. on its investigation regarding alleged anti-competitive conduct and will provide its position to the T.R.A. in due course. Viva Bahrain believes that it acted within the limits of the telecommunication law and in the best interest of the Bahraini consumer."

In this regard it’s necessary to remember that as soon as last year, in February 2010, the T.R.A. introduced a new competition-based framework for the regulation of retail tariff. This framework paved the way for the deregulation of Batelco’s mobile tariffs and calls to certain international destination. On that occasion, Dr. Mohamed Al Amer, T.R.A.’s chairman and acting general director expressly said that “As competition develops, there is a point at which aggressive competitive behavior may damage the normal operation of market forces and may be detrimental to consumers. The competition guidelines launched recently are an essential instrument that offers guidance on where and how T.R.A. may draw the line between anticompetitive and pro-competitive behaviors and how we will deal with anti-competitive complaints.”

On July 29, 2010, the T.R.A. released the Order no. 3 of 2010 (Batelco’s Retail Tariffs of International Calls to India and Bangladesh) aimed at Batelco’s anticompetitive behavior in the international calls market towards India and Bangladesh. The telecom authority had received complaints from other licensed operators (O.L.O.s), which alleged that their revenues and traffic minute volumes for calls to India and Bangladesh had declined dramatically since April 2010. The added cause for this decline was, according to the concerned O.L.O.s, that Batelco’s retail tariffs were below cost. For the O.L.O.s, these tariffs created a margin squeeze and/or a predatory pricing. After some investigations, the T.R.A., in order to prevent the likelihood of irreversible and irreparable harm to competition in the telecommunications market, ordered "Batelco to immediately  increase its Effective Retail Tariffs to the Relevant Routes to be less than the Retail Price floor for the Relevant Routes until such time as the Authority notifies Batelco".

This time, it’s possible to assume that probably the regulator’s decision won’t be severe. But it’s likely to think of having both Batelco and Viva obliged to increase their prices. This will have an impact on their market share, but in the end a price increase could help them to boost margins.        



 

International Code +211, Zain Sudan Is Already There!

July 21, 2011

Welcome to the Republic of South Sudan! Following January 2011 referendum in which 98.83 percent of the population of the previously Southern Sudan Autonomous Region voted for independence, on July 9, 2011 the Republic of South Sudan became an independent state from Sudan. And then, five days later the new country was admitted to the United Nations (U.N.). South Sudan seceded from Sudan after decades of civil war (First Sudanese Civil War 1955-72 and Second Sudanese Civil War 1983-2005). South Sudan’s population is estimated at eight million people while the country gets almost all its revenues from oil.

A few days after the independence, the new country received by the Geneva-based International Telecommunications Union (I.T.U.) a new international country calling code, which is +211 (before it used Sudan’s international code +249).

The telecommunications era started in Sudan before the end of the nineteenth century. Since then the telecommunications sector had been divided until twenty years ago between several government-owned small entities with scarce operational and financial autonomy. Notwithstanding a myriad of development efforts until the beginning of the 1990s, the telecoms sector remained very poor.

Only with the Government’s Three-Year Economic Salvation Program (1990-93) the role of telecoms sector was incentivized. At that time, telecommunications were recognized as a primary tool for the socio-economic development of Sudan. The program required the abolition of the monopolistic structure of Sudan’s telecoms sector and it called for admitting local and foreign private sector investments. Summing up, important investments were required in order to build the lacking infrastructure. 

The system is now based on three different subjects: the Ministry of Information & Communications, the National Telecommunication Corporation (N.T.C.), which is the regulator, and the licensed operators. In relations to mobile telecommunications the licensed operators are three: Zain Sudan (57 percent of market share in Q1 2011, license released in August 1996), Sudan’s Sudani (24 percent, license since February 2006) and South Africa’s M.T.N. (19 percent, license since October  2003). Sheer numbers explain that the most important player in the Sudanese theater is with no doubt Zain Sudan.

Zain Group is currently operating in seven countries of which six are located in the Middle East (Bahrain, Iraq, Jordan, Kuwait, Lebanon and Saudi Arabia) and one in Africa (Sudan). Before selling Zain Africa B.V. (which was present in 15 African countries) to Bharti Airtel in June 2010 for $10.7 billion, Zain was operating in 22 countries. Now Zain in Africa has operations only in Sudan, which is indeed a very relevant market with an interesting potential yet to be developed.

In February 2006, Zain purchased the remaining 61 percent stake of Mobitel, which was Sudan’s first mobile operator. This deal was valued $ 1.332 billion and thanks to this operation Zain obtained 100 percent ownership. Later, in September 2007, the company was rebranded to Zain Sudan and subsequently it renewed its license for a period of 20 years. Zain’s operations started in April 2008.

Q1-2011 data — the latest published — confirm potential of the Sudanese market. The company was able to increase by over 20 percent its customer base from Q1-2010 and to remain consistently the market leader with a market share of 57 percent. Notwithstanding the fact that Q1-2011 was one of the more problematic period of Sudan’s history  because of the political instability (January 2011 referendum decided for the independence of South Sudan), Zain Sudan reported in local currency (Sudanese pound) a 13 percent increase in revenues and an 11 percent increase in Ebitda in comparison to Q1-2011. In U.S. dollars the results are not as positive as with the local currency because of a more-than-13-percent devaluation of the Sudanese pound versus the U.S. dollar between the beginning of January 2011 and the end of March 2011. The graph below by ExchangeRate.com shows this trend.

In specific, on January 3, 2011, 2.5 Sudanese pounds were required for $1 while on March 29, 2011, (around the end of Q1-2011) 2.87 Sudanese pounds were required for $1. This translates into an almost 13 percent devaluation in just three months. As a matter of fact, Zain Sudan’s net profit was impacted by currency variance. Zain Sudan’s operation reported in Q1-2011 a foreign exchange loss (F.X. loss) of $52 million while in Q1-2010 there had been an F.X. gain of $32 million. Another factor impacting its operations was a 12 percent tax increase on the operations as of February 2011. This tax in 2011 reached 15 percent  while in 2010 it was just 3 percent. All this said, Zain Sudan aims at increasing its market share through an acquisition and retention strategy.  

Zain Sudan is currently in negotiations with the new country to pay a fee aimed at extending its Sudan license and being entitled to operate in South Sudan. Elfatih Erwa,  Zain Sudan’s managing director (previously a Sudanese state minister and Sudan’s permanent representative to the U.N.) pointed out that Zain Sudan would continue operating in South Sudan as it had done during the last three years (Zain started its operation in Sudan in April 2008) when this territory was not yet an independent country. Things may change once a new specific license is agreed upon.

It’s interesting to underline that although the fee to be paid to South Sudan, Zain Sudan excluded the possibility of demanding a reimbursement to Khartoum’s government in order to compensate the new costs required for operating in South Sudan The reason is that Zain Sudan’s plan is to split the companies into two entities: one operating in North Sudan and one operating in South Sudan.   

        

While in the last three years, the company has invested $1.2 billion in the whole Sudan, in the last five years it has invested around $300 million for what is now South Sudan. But, according to Elfatih Erwa, Zain is devoted to expanding its 3G services in South Sudan and the company is investing in 2011 around $110 million in fiber and its core network. In fact, the company is ready to roll out a fiber network to the Red Sea. Being a landlocked country, this fiber network will incur high costs because it necessarily has to be rolled out through North Sudan or Kenya for access to undersea cables. In South Sudan 3G services are already offered, but internet access is via satellite and for this reason the capacity is quite limited. A fiber network could really be a sea change.

In dealing with the poor South Sudan the real challenge for Zain Group will be to balance the possibility of an untapped, although poor, market with the high costs required for providing telecom services. What is positive now is that with a stabilized political environment companies deciding to do investments in South Sudan may base their strategic plans on a sounder basis.



 

What Future for Zain? A Rosy One (Part II) — The Reason: Balance Sheets Are Good

June 17, 2011

In Part I — Is the Etisalat-Zain Deal Definitively Over? it was explained that the failed Etisalat-Zain deal made sense for the Emirati company. The aim of Part II — The Reason: Balance Sheets Are Good is to provide a clear picture of Zain's markets and to analyze the company's full-year 2010 and Q1 2011 financial results. The latter, which are the latest available data, were released by the company in May.

Zain is currently operating in seven countries, of which six are located in the Middle East (Bahrain, Iraq, Jordan, Kuwait, Lebanon and Saudi Arabia) and one in Africa (Sudan). Before selling Zain Africa B.V., which operated in 15 African countries, to Bharti Airtel in June 2010 for $10.7 billion, Zain had operations in 22 countries. In five countries out of seven, the Zain Group has an ownership stake bigger than 51 percent (Kuwait, Sudan, Jordan, Iraq and Bahrain). In other words, it has management control. In Zain Saudi Arabia, the Zain Group owns a 25 percent stake while the remaining 75 percent is split between a Saudi Consortium (25 percent), the Public Pension Authority (5 percent) and free float (45 percent). Through its 25 percent, the Zain Group has the company’s management control, but Zain Saudi Arabia pays 4 percent of its annual revenue to the Zain Group for management duties. Moreover, the Zain Group nominates and appoints four members of the nine-member board of directors. In Lebanon, the Zain Group operates through the subsidiary M.T.C. Touch (no ownership), which since June 2004 has been developing one of the two G.S.M. networks thanks to management contracts renovated every time they have expired (the current contract will expire on February 1, 2012).

In five (including Lebanon) out of seven markets Zain is ranked first operator. In Saudi Arabia, it’s the third operator with a 16 percent market share, while in Bahrain it’s ranked second, but there, the three licensed operators have all similar market shares (Bahrain’s Batelco 37 percent, Kuwait’s Zain 32 percent and Saudi Arabia’s S.T.C. 31 percent). 

Kuwait, Iraq, Sudan and Jordan are the key markets for the Zain Group. Together they account for around 92 percent of the 2010 revenues. At the same time, these are the markets with the largest populations, and all with the exception of Jordan (already a mature market) have a relevant potential growth in the short to medium term.

Source: Zain’s Earning Release (2010)

Source: Zain’s Earning Release (2010)

Before analyzing the financial data it’s necessary to provide some preliminary considerations.

• Given the Zain Group’s ownership limited to only 25 percent, Zain Saudi Arabia is considered an associate company (the Zain Group has non-controlling interests) to the Zain Group, and its revenues are not added up directly to the consolidated statement of income.
• In the Zain Group’s statement of income 2010, Zain Saudi Arabia appeared only in two items: share of loss of associates (45,018,000 Kuwaiti dinars) and when differentiating net profits attributable to shareholders of the parent company (1,062,805,000 Kuwaiti dinars) from net profits attributable to non-controlling interests (25,013,000 Kuwaiti dinars).
• Although Zain Saudi Arabia reported for year 2010 a $628 million net loss, part of the overall net profit of the entire Zain Group has to be passed to the 25 percent stake in Zain Saudi Arabia — a percentage stake that is a non-controlling interest (associate company). And the Zain Group’s 2010 consolidated statement of income perfectly confirms this net income differentiation.

The below table shows Zain Group’s key performance indicators (K.P.I.s) for 2010.

In a nutshell, 2010 financial results show a strong increase in relations to many K.P.I.s:

• Consolidated net profit of $3.675 billion (1.063 billion Kuwaiti dinars, 445 percent increase), which is the highest ever in the Zain Group’s history. Net profit result is impressive, but it has to be underlined that $2.653 billion (770.3 million Kuwaiti dinars) is the capital gain linked to the sale of the African assets.
• Net profit from continuing operations amounts to $1.022 billion (293 million Kuwaiti dinars) with a 50 percent increase over 2009 net profit being $675.1 million (195 million Kuwaiti dinars).  
• Consolidated revenue reached $4.74 billion (1.35 billion Kuwaiti dinars) with a 7 percent year-on-year increase.
• The board of directors decided to release a $0.72 (200 Kuwaiti fils) cash dividend.
• Customer base increased 23 percent reaching 37.24 million in the seven markets considered.

It’s really important to understand that in 2010 the Zain Group was able to increase by around a 50 percent its net profit. Having had $675.1 million of net profit in 2009 and just after 12 months almost duplicating its net profit ($1,022 million) is quite an impressive result accomplished thanks to two primary factors: operating in very valuable countries and having developed a more efficient operational model. 

In specific, between 2009 and 2010 continuing operations increased overall their revenues by 7.02 percent (by 15 percent in Sudan, by 12 percent in Iraq and by 7 percent in Jordan. Saudi Arabia’s revenue — although not added directly to statement of income — increased by 98 percent). In addition to this, the Zain Group strongly reduced its finance cost and its share of loss of associates (Zain Saudi Arabia). Moreover, the Zain Group in 2010 experienced some gain from currency revaluation.  

The consolidated statement of income, partially reported below, well explains why — also not considering capital gain — net profit increased by 50 percent in just one year.  

The divestiture of African operations (cashing in $10.7 billion through the sale to Bharti Airtel) was aimed at focusing the Zain Group’s operations on fewer but highly cash-generative markets. In this way, cost synergies could be implemented as the Zain Group’s C.E.O., Nabeel Bin Salamah, pointed out in his C.E.O. statement included in the Zain Group's 2010 Annual Report. The Zain Group entered the African markets in May 2005 when it purchased Celtel International, which operated at that time in 13 countries and served around 5.2 million customers (data relative to beginning 2005). Later, Zain acquired one license in Ghana and one in Nigeria, while it improved the networks in all the served countries. The Zain Group’s 2009 Annual Report showed that at the end of 2009 the Zain Group had — only in Africa and excluding Sudan — 42.1 million customers of which 14,777,000 in Nigeria and 1,283,000 in Ghana. All this means that if Celtel had around 5.2 million customers in 13 countries at the beginning of 2005, only five years later Zain Africa B.V. had in the same markets 26 million customers, i.e., it had obtained a 500 percent increase in the customer base without counting Nigeria or Ghana, both of which were not part of the Celtel deal.

 

Moreover, comparing the K.P.I.s between Zain, Etisalat and S.T.C., which are the three most relevant Middle Eastern telecom operators, shows very impressive results on the part of Zain. In general, the Kuwaiti firm with just one quarter of the customers served by Etisalat and S.T.C. has been able to obtain around 50 percent of Etisalat’s profits and 40 percent of S.T.C.’s. It’s with no doubt a very good result. Understanding the reasons behind this achievement would require additional research, but it’s possible to assume that one ingredient of the rationale — apart from the profitability of the markets where the company operates — is entwined with Zain’s operational efficiency, which is the cornerstone of Zain’s new way of doing business. And Chairman of the Board of Directors, Asaad Al Banwan explicitly affirmed in his Chairman’s Message included in the Zain Group's 2010 Annual Report that the Zain Group had launched comprehensive restructuring initiatives with deep changes at the level of all of its various executive departments and sectors. The aim was to align its operations with the new strategic directions (See the Zain Group's 2010 Annual Report p. 5).

At the beginning of May 2011 Zain posted very positive Q1 2011 (Q1 ended on March 31, 2011) financial results showing vigorous growth with reference to several K.P.I.s. The results underlined a year-on-year 40 percent net income increase to $251.1 million (revenues $1.163 billion) and a 20 percent increase of the served customers (in total they were 37.6 million). The above table specifies the results for Q1, 2011.

In addition to increased net income and served customers, Zain improved by 1 percent in comparison to Q1 2010 its consolidated revenues reaching $1.163. Ebitda at $529.7 million was up 10 percent than in Q1 2010 with a 46 percent margin (4 percent higher than the previous year). EBIT also increased by 10 percent reaching $379.9 million. Earnings per share were $0.06 (for Q1 2011 U.A.E.’s Etisalat paid the same amount while Saudi Arabia’s S.T.C. paid $0.13).

From sketching some conclusions at the end of this research, it emerges that the numbers expressed by financial data confirm a positive trend for the Kuwaiti company. At least three of the markets where it operates have a huge potential still to be fully developed.  Some analysts affirm that although the numbers look fine, Zain is an expensive stock. They are cautious because they think that Zain’s shares are trading at too high a multiple compared to the rest of the sector.

The latest data — as shown by the above table — portray a partially different picture with Zain’s P/E and P/BV in line with the values of Etisalat and S.T.C. This readjustment followed the price reduction of Zain’s share that had been a constant trend since the last two weeks of December 2010 (on December 19, 2010, the Etisalat-Zain deal was canceled for the second time) until the end of May 2011. The chart below fully shows the movement of Zain’s share price in the last year.

Zain’s Share Price in the Last Year

Summing up, the Kuwaiti company has very positive balance sheets reflecting operations and assets in very profitable markets, top-notch operational model, and relevant cash resources to be invested in future acquisitions. All these elements contribute to depicting a rosy future for the Zain Group. “Zain’s numbers don’t show management has been distracted by the takeover talk — its core operations have been performing okay” said Nomura’s telecom analyst, Martin Mabbut,. In other words, the only change to be done now pertains to the shareholders’ side. In fact, after the failure of the Etisalat-Zain deal, it’s still not clear whether the consortium led by the Al-Kharafi Group, which wanted to sell a 46 percent stake in Zain, still wants to (and is able to) carry on with that project. If the answer is negative some other alternatives will have to be developed. 

  

What Future for Zain? A Rosy One (Part I) – Is the Etisalat-Zain Deal Definitively Over?

May 19, 2011

Last March U.A.E.’s Etisalat decided not to bid for the takeover of Zain’s 46 percent stake valued at around $12 billion (1.7 Kuwaiti dinar the share). The reason for this pull back  was due to four different factors: Zain’s divided board, the extended due diligence, regional unrest in the MENA area and the new Kuwaiti capital markets legal framework (Law No. 7 of 2010, a.k.a. C.M.L., and C.M.L. Bylaws of March 13, 2011) related to takeovers. According to the new law the buyer of more than 30 percent of a Kuwaiti listed firm is obliged to bid for the remaining outstanding shares. “The main reason was the mandatory tender offer … that would mean we would have to tender offer to all shareholders that would make it more than $12 billion” pointed out the chief international investments officer of Etisalat, Jamal al Jarwan.

Right now it’s not clear whether Etisalat will bid a second time for Zain. For the Emirati company it would be much better trying to bid for Zain, which is present in seven MENA markets (Kuwait, Bahrain, Iraq, Jordan, Lebanon and Saudi Arabia, although Etisalat’s offer could not encompass Saudi Arabia). In this way, Etisalat could create a powerful synergy without bidding separately in every country.

With the purchase of Zain, Etisalat could save both economic resources and time.  A consideration stands out immediately: One thing is acquiring a new license with operations to be launched from the scratch (for instance in the case of Syria’s third mobile license), other thing is acquiring the 46 percent of a company already operating in cherry-picked MENA markets and having in all of them a highly estimated goodwill.

Analysts are divided between those who believe that a sale could follow briefly and those who think that the moment has gone. But occurring a sale, the price would be below the price previously envisaged that corresponded to 1.7 Kuwaiti dinar per share ($6.15). To begin with, the price reduction is partly due to the fact that shareholders have already received the 2010 dividend payout in the amount of 200 fils per share ($0.72. This price is due to last year’s sale of Zain’s African assets to India’s Bharti Airtel for $9 billion).

Mr. Al-Jarwan said that at a certain point Etisalat could still bid for Zain’s assets, but that it was important to first understand how events would develop, hinting probably to the diverse positions present within the Zain board of directors. It was a consortium led by the Al-Kharafi Group that wanted to sell the 46 percent stake in Zain. The Al-Kharafi Group — thanks to one of its units the Al-Khair Group — owns directly a 12.7 percent stake in Zain, but analysts estimates that in reality through other companies the Al-Kharafi Group should own or control a 20 percent stake in the Kuwaiti telecom company.

A few weeks after the collapse of the Etisalat-Zain deal two events materialized in April 2011, and both could now have a relevant impact on Zain’s future at least in relation to its shareholding structure.

First, the Al-Kharafi Group has improved its position in Zain's newly elected board of directors. In specific, the Al-Kharafi Groups vice-chairman, Bader Al-Kharafi has joined the board. Second, on Sunday, April 17, 2011, the chairman of the Al-Kharafi Group, Nasser Mohammed Abdul Mushin Al Kharafi (father to Mr. Bader Al-Kharafi) died in Egypt of a heart attack. He was a skilled businessman and the mastermind of the Etisalat-Zain deal. Notwithstanding his death, it could still be possible, although not sure, that the Al-Kharafi still-to-be-appointed new chairman could also push for divesting from Zain. In fact, the Al-Kharafi Group “borrowed to get the Zain shares and borrowed to speculate in other investments. Kharafi has a lot of debt and Zain is a big liquid asset and some of its assets are not so liquid” said Nasid Al-Nafisi, general manager with the Kuwait’s Joman Center for Economic Consultancy. It’s currently estimated that the group has direct and indirect liabilities worth at least $5 billion and selling the Zain’s share could be a means in order to repay its debts.

The negative drawback for the Al-Kharafi Group is that by selling to a purchaser only its 20 percent stake, the buyer will not be able to conquer management control in Zain. Only owing 46 percent of Zain’s outstanding shares may provide a 51 percent stake after excluding Treasury shares.  By selling just a 20 percent stake, the Al-Kharafi Group will be forced to request a consistently reduced price than what it has previously requested.

Another viable option for the Al-Kharafi Group could be to sell some of the assets belonging to Zain, similarly to what happened last year with the sale of Zain’s African assets to Bharti Airtel. “Selling assets would be a way for shareholders to raise money without triggering a buyout of the whole company” affirms Nomura’s telecom analyst, Martin Mabbutt. And a step toward this direction has already been taken with the decision to sell Zain’s 25 percent stake in affiliate Zain Saudi Arabia to two joint bidders: Saudi Arabia’s Kingdom Holding and Bahrain’s Batelco. The agreed price is $950 million. Probably, by Q3 2011 this Saudi deal will be closed. This Saudi deal was also a precondition for  Etisalat’s failed acquisition of Zain’s 46 percent stake.

If Etisalat had acquired Zain’46 percent stake, it would have been forced to sell Zain’s 25 percent stake in the Zain Saudi Arabia subsidiary, which is currently competing with Etisalat’s Mobily in the Saudi Arabian telecoms markets. Saudi Arabia’s I.T.C. regulator, the Communications and Information Technology Commission (C.I.T.C.) could have never accepted to have two out of three mobile licenses controlled by the same operator (in this case Etisalat).

Moreover, in the wake of the last global financial crisis Kuwait has introduced a new legal framework for capital markets. This framework — whose aim is to regulate the financial markets and the mergers and acquisitions sector — is based upon Law No. 7 of 2010, a.k.a. C.M.L., and C.M.L. Bylaws of March 13, 2011. According to article 271 of the C.M.L. Bylaws, any person (or his affiliates of alliances) having an ownership interest (directly or indirectly) of more than 30 percent of the total share of a company listed on the Kuwaiti stock exchange (K.S.E.) is obliged to produce an offer to purchase the remaining outstanding shares (70 percent).

So, if Etisalat decides to bid for a stake in Zain, two are the available options. The first option for Etisalat means not getting management control. The second option means bidding for more than Zain’s 30 percent shares.  But as a consequence, the second option would mandatorily force Etisalat to bid for the entire company. Indeed, the second option requires many more economic resources. All this said, it is unlikely that the government of Kuwait sells its estimated 30 percent stake in Zain, so when trying to get management control, Etisalat would be obliged to fund up to 70 percent of Zain’s share (leaving aside the Kuwaiti government’s 30 percent stake.

The price proposed some months ago was 1.7 Kuwaiti dinar per share when at the beginning of October 2010 the price at the Kuwait Stock Exchange was around 1.4 Kuwaiti dinar. The selling shareholders would have received a premium of around 0.3 Kuwaiti dinar or an 18 percent price increase in trading their shares. Assuming that the proposed price was still right, acquiring the additional 24 percent (70 percent—46 percent=24 percent) would require additional $6.2 billion, which  would increase the whole investment up to $18.2 billion. With no doubt a lot of resources also for a cash-rich company such as Etisalat, which since 2006 has spent on acquisitions around $33 billion, according to Dealogic, a data provider.

The price proposed last year is not anymore reliable because two factors contributed to reducing its entity: the consistent dividend already passed to the shareholders and Zain’s share value that is in mid-May 2011 around 1.06 Kuwaiti dinar versus 1.4 Kuwaiti dinar in October 2010. Today’s current market capitalization is $16.4 billion, while on October 13, 2010, it was $21 billion (6.1 billion Kuwaiti dinar). If Etisalat decides to bid a second time — no matter what available option it chooses — the price will be consistently lower than 1.7 Kuwaiti dinar per share. Moreover, for some analysts also the current price is still too high. “… Zain is an expensive stock, and so we are cautious because we think it’s trading at too high a multiple compared to the rest of the sector” points out Mr. Mabbutt.

Apart from its board of directors’ divisions about the ownership of the company, Zain is operating in quite interesting markets, namely in Iraq, Kuwait and Sudan. It was before, and it is still a very expensive target notwithstanding the additional share price reductions.

The only regional alternative to a purchase by Etisalat could be a bidding offer from Saudi Arabia’s Saudi Telecom Company (S.T.C.), which overlaps its assets with Zain’s only in Kuwait and Bahrain, but not in the two most promising Zain’s markets: Iraq and Sudan. As the table above shows, the problem is that S.T.C. has a lot less cash and cash flows equivalents (73 percent less) than Etisalat’s in order to guarantee a financing plan with banks. In this regard, given the volatility of the MENA region’s capital markets, also Etisalat’s proposed financing scheme for the failed acquisition would have probably been revisited forcing the U.A.E. company to pay more. In addition to this, S.T.C. did not show interest in Zain, while it’s currently refining and consolidating its overseas portfolio (see Indonesia) or bidding for single licenses (for instance in Syria). Telecoms firms not belonging to the MENA region (but already operating there) could also be tempted by the possibility of creating related synergies, but the problem is always the same: Zain is a big and valuable company. Purchasing it means only one thing: borrowing huge economic resources.