Zain Africa Speculation Watch: Episode 9 - Can Vivendi do it?

Zain CEO Saad al Barrak:
thumbs up to the sale of Zain's African operations? You'd have to ask the shareholders...

DevelopingTelecomsWatch celebrates its 100th blog post with another episode of Zain Africa Speculation Watch. Will that turn out to have been a future-proof title for this mini-series? Maybe not, because for the first time since DTW started visiting this theme, one of the companies rumoured to be interested in acquiring the African assets of the Kuwaiti telecoms group has actually confirmed that interest. It seems, therefore, that we are now moving beyond the speculation stage.

That said, perhaps for now we can stick with the term 'speculation' in the title of these musings. The speculation today, however, will move from wondering which prospective suitor looks the most plausible to wondering whether one particular suitor really has the wherewithal to do the deal.

That suitor is one whose name seems to have been in the mix since day one - Vivendi, the French international media conglomerate which is active in music, TV, movies, publishing, video games and telecoms.

Last Thursday, the group confirmed that there is indeed some interest in acquiring Zain's African operations. James Middleton of telecoms.com, reporting the story the next day, concluded his article with the caveat that the French firm has cautioned that at this stage there is no certainty that the discussions will lead to an acquisition.

This last point is echoed by a Financial Times article written the same day, which notes that Vivendi Chairman & CEO Jean-Bermard Lévy has "a track record of walking away from deals he regards as too expensive", something that has provided "some reassurance to analysts that the company will not over-pay."

The last time we looked at this story here, sums of USD 10 billion and USD 12 billion were mentioned as possible prices for Zain's collection of African MNOs. This is not far off the money from a Vivendi perspective according to the FT article, which cites "people familiar with the matter" who apparently say that the French group values Zain's African unit at USD 10-11 billion. A big concern for Vivendi, however, according to the company's statement of July 9th, is "keeping its credit rating and its dividend at their current levels".

This last point was mentioned in Episode 3 of Zain Africa Speculation Watch, when I noted that Reuters writer Adam Durchslag had expressed doubts about how Vivendi, with net debt of around EUR 8.3 billion, would be able to afford such a significant acquisition without putting that all-important investment grade BBB credit rating in jeopardy.

This concern about maintaining the group's credit rating notwithstanding, were this purchase to go ahead, it would, as the FT article notes, be Mr Lévy's fifth large acquisition in less than four years. The same article reports the opinion that the purchase of Zain Africa makes good strategic sense, giving Vivendi wider exposure to fast-growing markets at a time when its domestic telecoms and pay-TV businesses are facing stronger competition and its music business is in decline.

While it is pretty clear that Vivendi has pretty compelling reasons to consider a purchase of this size and nature, it is worth asking once again why Zain might be prepared to make the sale. According to the FT, Zain CEO Dr Saad al Barrak simply felt obliged to alert the Kuwaiti group's shareholders to the approach by Vivendi.

"If we are approached by big players with clear value creation we have to pass this to our shareholders. This is not a decision for us on the management level. It is all up to the shareholders to decide," the Zain CEO told the FT. He also revealed that only Vivendi has made an offer for the African assets.

Those shareholders have already felt the effects of the speculation. Matt Smith of Reuters reported yesterday that Zain's shares jumped 9.8% after news broke of Vivendi's confirmed offer for the company's African unit. Sounds good? Sure, but the very day that Vivendi was confirming its offer, Saad al Barrak had denied a deal was on, causing a fall of almost 9% in Zain shares, according to another Reuters article.

It remains to be seen whether that means that no other groups are likely to come forward to trump any offer from the French group - if such an offer does ever happen. Doubts are likely to remain for now. As Cyril Altmeyer of Reuters wrote late last week, analysts have expressed the view that it would be possible for Vivendi to take full control of Zain's African operations without endangering its BBB rating. Altmeyer's article quotes an unnamed banker who contends that with Vivendi having put something on the table, Zain and its advisers are probably figuring out whether to have targeted discussions with other interested parties." The same banker feels that potentially interested parties would be France Telecom, China Mobile and Vodafone.

This article also states that one way for Vivendi to make the Zain Africa acquisition without risky capital raising at group level would be to make the approach though Maroc Telecom, which is not in debt and in which the French group holds a 53% stake.

More twists and turns, then. Keep watching.

Zain Africa Speculation Watch: Episode 9 - Can Vivendi do it?