Analysis: Etisalat gathers Middle East momentum

Last month Capacity reported that Etisalat was close to agreeing a deal to acquire a 46% stake in Kuwaiti operator Zain.

A preliminary deal has been agreed between Etisalat and Zain

A month on and the potentially landmark Middle Eastern deal remains – at the time of going to press – unresolved, but generating plenty of headlines.

A preliminary deal between the two companies, believed to be worth about $12 billion, was agreed in early November. Although the bid is for 46% of Zain, the Kuwaiti operator has just 10% of its own shares, meaning that Etisalat’s bid is for a controlling stake.

The UAE-based Etisalat currently has operations and investments in 18 countries in the Middle East, Asia and Africa and will add Bahrain, Jordan, Kuwait, Lebanon and Morocco to that figure if the deal goes through. Zain, which recorded consolidated revenues of KWD 672.6 million (US$2.33 billion) in the -first half of 2010, also has a strong presence in Iraq, Kuwait, Bahrain, the Lebanon and Sudan – all markets which could help Etisalat speed past its regional rivals. “In terms of subscribers in Africa and the Middle East, Etisalat would take its place among the top three players, along with MTN and Vodacom, if the deal were to go ahead,” said Kerem Arsal, analyst for Africa and Middle East at Pyramid Research.

“If Etisalat can translate the increase in subscribers to operational savings and creative promotions and services, it can widen the gap from other Middle Eastern competitors.”

Yet Saudi Arabia could prove to be a potential stumbling block in the move. Etisalat already has operations in the kingdom in the form of Mobily. Due to anti-competitive issues, any deal would be subject to the disposal of Zain’s share-holdings in Zain Saudi Arabia. Due diligence between Etisalat and Zain is already underway, but the proposal will be terminated unless a definitive agreement is reached by January 15 2011. In the meantime, worldwide media sources have reported that a Zain board member has threatened legal action to block the move following concern the company would be unable to receive a fair price for its Saudi assets.

Etisalat has already begun financing the deal by reportedly creating an $8 billion bond programme, which features a $7 billion global medium-term note (GMTN) programme and a $1 billion sukuk programme that will allow the company to issue conventional or Islamic bonds when required.

“Surprisingly, sometimes M&A activities in the region can take place too hastily and the obvious is not considered during the time of offer. For instance, when Vimpelcom approached Orascom, the reasonable assumption of anybody who observed the event was that Vimpelcom must have already assessed the situation in Algeria, made up its mind and agreed with its partners. Now, the deal is possibly breaking apart due to the obvious taking force,” said Arsal.

“The same thing can still happen in the case of Etisalat and Zain. If the Saudi regulator strictly blocks this transaction then the deal will lose much of its value.”

For just over 30 years, Etisalat was the sole telecoms provider in the UAE, holding a virtual monopoly on the region’s mobile, fixed-line and internet market. e arrival of Du in February 2007, however, has seriously threatened Etisalat’s dominance in the domestic market and has led to significant changes to its mobile tariff structure. The operator’s monthly average revenue per user (ARPU) is estimated to have decreased from Dh176 ($47.9) in 2007 to Dh118 ($32.1) in the most recent quarter, while a recent bond prospectus - led by Etisalat on the London Stock Exchange revealed the company – in advance of its issuance of $8 billion in bonds – has over Dh5.3 billion ($1.44bn) of existing debt.

Such debt, however, is reported to be mainly tied to Etisalat’s international operations, in particular its Egyptian subsidiary which is estimated to owe as much as Dh2.18 billion ($593 million). Yet Etisalat’s prominent international activity has continued in recent months with Etisalat Afghanistan – a wholly owned subsidiary of Etisalat – signing an agreement with the Afghanistan Telecommunications Regulatory Authority (ATRA) to extend its telecoms network to rural and remote areas of the country. The company is also one of six to apply to become Syria’s third mobile operator.

Speaking at this year’s keynote panel at Capacity Europe, addressing the issue of new growth markets, Scott Sullivan, vice president strategy of Etisalat Cable and Wholsale Services, highlighted the company’s recent domestic and international developments. “It’s obvious from the areas we have invested in that a proportion of it is opportunistic, and generally we focus on mobiles through either licences or operators,” said Sullivan.

“If you look at Saudi Arabia, we managed to get in there very quickly and obtain a very dominant share of the market, and in the case of Pakistan, we invested in the incumbent Pakistan Telecommunication Company Limited (PTCL). In other countries, it has depended on the opportunity, but the focus has overall been on the Middle East, south Asia and Africa.