Zain (Africa) Speculation Watch: Episode 13

Anil Ambani, Reliance Communications: eyeing Zain's African operations?

The newswires have been humming with more than enough Zain-related information over the last few days to justify this thirteenth episode of our mini-series following the summertime rumours around the Kuwaiti telecoms firm.

On Sunday, Eman Goma of Reuters reported that the pan-MEA mobile group has asked shareholders to vote on removing certain ownership restrictions, a move that would pave the way for selling a large stake. This seems to have prompted a Sunday surge in Zain's shares on the Kuwaiti stock exchange, as speculation rose that the move could allow an outside investor to take a large stake in the company.

In the most recent chapter of the Zain (Africa) Speculation Watch story, we considered the possible sale of the 24.61% stake in the operator held by the Kuwait Investment Authority (KIA) (the Gulf state’s sovereign wealth fund) - Kuwaiti newspaper al-Rai, had reported that "the KIA has no objection to discussing any offer to buy its stake in Zain whether made by the UAE’s Etisalat or others under the condition that the offer would be serious and with attractive returns."

Without expressing an opinion about possible purchasers of that stake, it now seems that Zain's management would welcome the opportunity to part ways with the KIA. As a Cellular News article reported this week, Zain CEO Saad al-Barrak has said that he wants to see the sovereign wealth fund sell its stake in his company as soon as possible. "I wish they would leave tomorrow, and I am working on this," he said. He added that the motivation was to ensure the company could operate without political interference.

Whatever the future holds for the group as a whole, stories continue to bubble up about Zain's African portfolio. Only yesterday, that man Eman Goma was reporting comments made by Barrak to al-Rai, to the effect that the company is in talks with three major telecoms firms, including one from India, to sell all or part of its African operations.

Which companies are being referred to here? One of them might be France Telecom. Ten days ago we noted here that in a recent Reuters note on the French incumbent telco's need to limit margin erosion, Finance Director Gervais Pellisier was quoted as saying that the company "might look at some of the African assets of Kuwait's Zain if the latter decided to sell them in parts."

What about the unnamed Indian party? Could that be Bharti Airtel? Back in February, I would not have hesitated to offer that name as my best guess. An article by a former colleague of mine, Nick Jotischky of Informa Telecoms & Media, prompted me to write my own piece about whether India's market-leading cellco might be driven to more aggressive international expansion by the numerous competitive pressures it faces in its home market.

Since then, of course, the Indian mobile operator has been involved in lengthy talks with South Africa's MTN group about a possible tie-up between the two. Given the apparent complexity of those discussions, is it naïve of me to assume that simultaneous talks with Zain would not be feasible? After all, my understanding has always been than an exclusivity agreement has been locking Bharti Airtel and MTN out of discussions with other prospective bedfellows. Earlier this month, the Bharti Group announced the extension of this exclusivity period through to 31st August, and the Economic Times has reported in the last few hours that Bharti Airtel is now very close to raising the funds needed for what would India’s biggest cross-border deal to date, surpassing Tata Steel’s acquisition of Corus for USD 12.2 billion in 2007.

Even if it were possible for India's leading mobile operator to discuss any interest in Zain's African assets at the same time as working on its mooted tie up with MTN, another complication would be that the Kuwaiti group and the South African group have somewhat overlapping footprints. The two companies compete with each other in Congo, Ghana, Nigeria, Uganda and Zambia.

As Eman Goma's article noted, this issue of overlapping assets would also have to be taken into account in any approach Etisalat may make for Zain. Goma quotes Prime Holdings analyst Sleiman Aboulhosn, who says that the Emirati group may be content to cherry pick some of Zain's assets in the region, given regulatory restrictions on a wholesale purchase. "Etisalat cannot buy the ones that co-exist with its own assets, for example in Nigeria," he said in Dubai. "So they might be interested in some parts."

If Bharti Airtel is currently an unlikely suitor for Zain, which other Indian companies might be making the enquiry mentioned by Saad al-Barrak? One possible candidate is state-owned telco BSNL. In June, Reuters reported comments made by the company's Chairman, Kuldeep Goyal, who said the the public sector telco is looking to expand to Africa by acquiring new licences or stakes in firms. "We are looking into various options there... getting into new licences, which are being issued, or partnering with existing licencees (and) taking a stake," Goyal told reporters. Asked whether BSNL, which has cash stockpile of more than USD 6 billion, was ready for a big acquisition, he said: "Yes, why not?"

The positive assessment of the state of BSNL is not shared by Kunal Kumar Kundu of consulting and IT services firm InfoSys. In our most recent article here at DTW, I quoted Kundu's recent Asia Times article, which is nothing short of a gloomy assessment of the health of the state-owned operator, which he feels is set to go the way of struggling government-run Air India, "which has had to crawl cap in hand for a state bailout to survive."

If Kundu's analysis is correct, and if this would prevent any ambitious foreign adventures by BSNL (rather than perhaps actually making it imperative to consider them), perhaps Reliance Communications is a more plausible prospective purchaser of some or all of Zain's African assets? Towards the middle of last year, the Anil Dhirubhai Ambani Group-owned operator withdrew from inconclusive talks of its own with MTN. Another Economic Times article written in the last few hours suggest that the Indian operator's interest in Africa has not waned since then. Amrita Nair-Ghaswalla writes that "sources" have named Reliance Communications as the Indian company currently in discussions with Zain.

The last time DTW visited the topic of all this speculation about the future of Zain, much was made of the impresssive performance of the company's stock since the rumour mill really got churning around mid-May. I even considered whispers passed to a loyal DTW reader - and then to me - to the effect that "the whole Zain thing" has merely been a highly successful attempt to manipulate the Kuwaiti group's share price. If there is anything in that suggestion, the success of any such ruse would appear to have come to a halt around a week after we discussed it here, should we choose to heed the warning noises emanating from Dubai-based investment bank Shuaa Capital. Late last week, Ramya Dilip of Reuters noted that the bank had downgraded Zain to "sell" from "neutral," saying the risk-reward profile of the shares were no longer attractive at current levels.

Around the same time, another Reuters piece carried quotes from analysts who could see the logic of selling the African assets and predictions about Zain's ongoing strategy in the wake of any such sale.

"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."

According to this article, African markets account for about 62% of Zain's 64.7 million customers, but only 15 % of the group's net profit, as of the end of March. Seven out of 16 African operations, the article states, made a first-quarter net lost. In the Middle East, only the Saudi Arabian operation was loss-making.

"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 Shuaa Capital.

If Simonian is correct, Zain's growth plans would be downgraded as the majority of the Middle East markets served by the group are mature to the point of saturation, the exceptions being Jordan and Iraq, where operators face security issues, a relatively unpredictable regulatory/licensing environment and the prospect of a new entrant in the mobile space.

In that scenario, Zain would presumably focus primarily on upgrading existing networks and increasing revenues from mobile broadband multimedia services.

Work of this kind is naturally ongoing across the group's Middle Eastern operations. The Saudi opco, for example, last week announced that it had secured a USD 2.5 billion Islamic loan facility (Murabahah), which will be used to repay an existing Murabahah facilitating network expansion and future growth.

In Bahrain meanwhile, writes Roger Field of ITP, Zain is planning to upgrade its network with LTE technology in a bid to "future proof" its operation and gain an advantage over rival operator Batelco and the new entrant cellco owned by Saudi Telecom. Field observes that Zain Bahrain has failed to provide a timeframe for the network upgrade, but notes that similar projects in other parts of the world are expected to take more than a year to complete, from the time they were announced.

This wraps up another episode in this ongoing saga. Perhaps the fact that Zain's own Saad al-Barrak seems to revealing snippets to the Kuwaiti press suggests that the story is moving beyond the speculation stage. Whether this means we can expect to see imminent announcements about the future of Zain and of its African operations remains to be seen. Keep watching.

Zain (Africa) Speculation Watch: Episode 13