Etisalat set to become MEA mobile superplayer following Zain deal

Brought to you by Wireless Intelligence

Etisalat’s planned acquisition of a majority holding in Kuwait’s Zain will make the combined group a major regional powerhouse with a global footprint spanning 24 countries. According to Wireless Intelligence, based on Q3 2010 data, the combined group would have a total customer base of 150 million, or 70 million proportionate connections based on percentage group ownership. Both firms have existing mobile operations across the Middle East, Africa and Asia. However, their respective footprints only overlap in one market – Saudi Arabia – where the Zain unit is expected to be divested in order to secure regulatory clearance.

Zain confirmed last weekend that it had invited Etisalat to begin due diligence with a view to acquiring a 46 percent stake in the Kuwaiti firm. Given that 10 percent of Zain is held in treasury shares then Etisalat’s offer represents 51 percent of its issued share capital. The transaction is valued at US$11.7 billion and the two parties have set a deadline of 15 January 2011 to close a deal. For Zain, talks are being led by the Kharafi family, one of its largest shareholders, though some smaller Zain shareholders have already raised objections to a sale, which could delay or even derail the process.

A deal would be the second major transaction at Zain in the space of a year, following the earlier sale of 15 of its struggling African networks to India’s Bharti in a similarly-sized transaction. That deal significantly reduced Zain’s international footprint, leaving it with just one wholly-owned African subsidiary (Sudan). However, Zain Sudan is one of the best performing assets in the current Zain portfolio, accounting for 28 percent of its customers and 24 percent of revenue in the first nine months of 2010. Moreover, according to our data, Sudan would be the largest single unit in the enlarged group (on a proportionate basis) with 9.7 million connections in Q3 (see table). Zain Iraq – which accounted for 33 percent of Zain’s customers and 31 percent of revenue – would be the second-largest market on this basis.

These two markets aside, Zain’s reduced market footprint is now concentrated in the Middle East with operations in Kuwait, Bahrain, Jordan, Saudi Arabia and Lebanon (the latter run via a management contract). In most cases these markets are highly-advanced and lucrative, but also highly saturated. Its home market of Kuwait, for example, accounts for 26 percent of revenue but just 5 percent of customers.

Meanwhile, Etisalat’s current mobile footprint covers 16 markets following an aggressive acquisition drive over the last five years that has seen it expand into Africa and buy strategic stakes in major operators such as Indonesia’s XL and Pakistan’s Ufone. However, its most significant asset outside of its home market is in Saudi Arabia, where its Mobily-branded network is the main competitor to the incumbent STC. Etisalat runs Mobily in conjunction with six local partners and 20 percent of the firm is listed on the Saudi Stock Exchange. According to our data, Mobily surpassed 20 million connections in Q3, making it over twice the size of Etisalat’s mobile unit in the UAE.

The majority of Etisalat’s African assets relate to its 2005 acquisition of Atlantique Telecom, which saw it enter seven West African countries under the ‘Moov’ brand. It has separate African mobile assets in Egypt (Etisalat Egypt), Nigeria (EMTS) and Tanzania (Zantel), as well as a fixed-line business in Sudan (Canar). More recently it has switched its focus to the subcontinent, acquiring Millicom’s Tigo mobile business in Sri Lanka in 2009 and funding a new Indian mobile start-up, Cheers Mobile.

Despite this rapid international expansion, the vast majority of Etisalat’s revenue is still generated in the UAE, where it operates numerous telecoms and non-telecoms businesses. Etisalat’s UAE revenues for full-year 2009 were AED23.2 billion (US$4.5 billion), while international revenues were just AED3.8 billion. However, domestic sales fell 2.6 percent from a year earlier, while international revenues grew by 61.5 percent. Total 2009 revenues grew 5 percent to AED30.8 billion.

Matt Ablott, Senior Editorial Analyst:

 Etisalat has to date deployed a piecemeal approach to international expansion, picking up assets as they have arisen, which has led to a somewhat disjointed global footprint. Its track record in this regard is not flawless either: for example, it was thought to have vastly overpaid Pakistan for its 26 percent stake in PTCL (Ufone’s state-owned parent) and then subsequently fell out with the government over the running of the firm. Compared to some of these more risky acquisitions (Afghanistan being another), the newly-slimmed Zain represents a relatively safe bet that will allow Etisalat to consolidate its position as the Middle East’s largest operator group. It will remain a relatively minor player in Africa, but as it has shown in Egypt – where it became the first operator on the continent to rollout HSPA+ – it is not afraid to invest in markets where it sees potential. In Sudan, Etisalat stands to take control of one of Africa’s best-performing operators (and one which Zain deliberately withheld in the Bharti deal). Zain Sudan controls 60 percent of a fast-growing, underpenetrated market, and is currently growing revenue by 20 percent a year. Etisalat has been linked with a move into the Sudanese mobile market for some time and will also be attracted by synergies between Zain Sudan and Canar, its existing Sudanese fixed-line business. If the deal goes through, it will be bittersweet for Zain, which only a couple of years ago had plans in place to become a top ten operator in its own right. Shareholders are understandably aggrieved at the operator’s decline and will demand a good price to sell to a regional rival. One major sticking point will be what happens to Zain Saudi Arabia, which will not be allowed to co-exist with Mobily if the deal goes ahead. The asset will be appealing to rival Middle East operators such as Qatar’s Qtel (which has denied interest) or Bahrain’s Batelco but some Zain shareholders have voiced their opposition to selling-off the Saudi business on the cheap.

Combined Etisalat/Zain mobile markets Q3 2010
Ranked by proportionate connections based on respective % group ownership
*: Operated via management contract
Source: Wireless Intelligence

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