Sunday, February 21, 2010

Kuwait's Zain Faces Revenue Growth Battle After Africa Ops Exit

[zawya] Kuwait's Mobile Telecommunications Co., or Zain, is likely to struggle to grow revenues after deciding to offload most of its Africa assets, quashing previous aspirations of becoming a top-ten global player by the end of 2011, analysts said.

Zain, the third-largest Arab telecom company by market value, Monday said it has entered into exclusive talks with India's Bharti Airtel (532454.BY) to sell assets in 15 African countries, excluding Sudan and Morocco, in a deal valued at $10.7 billion.

The transaction, which is subject to regulatory approval and due diligence by Bharti, would be one of the biggest asset sales by a Gulf company and the largest by a Gulf telecom operator.

Zain said on Tuesday it expects net proceeds of up to $5 billion from the deal. Money from the sale, if realized, would be included in the company's second quarter earnings.

The Africa asset disposal could however consign Zain to life as a regional mobile company operating in just two African countries and six Middle Eastern states with a focus on big markets like Kuwait, Saudi Arabia and Iraq.

"Because of the maturity of the Middle East operations, and strong competition in Zain's home market of Kuwait, we expect revenue growth to ease," said Irfan Ellam, an analyst at Dubai-based Al Mal Capital.

The resignation of chief executive officer Saad Al Barrak earlier this month opened the way to the Africa exit, ending nearly a yearlong shareholder-management feud over the future of the company, analysts said.

Kuwait's Kharafi Group was seen as the main catalyst behind the Africa asset sale after an attempt to sell a controlling 46% stake in Zain to an Indian-Malaysian consortium for about $13.7 billion stalled. The process wasn't backed by Al Barrak, analysts said.

"This (2011 target) was Dr. Barrak's goal, but the financial crisis came and a major shareholder required some cash and they needed to sell some assets," said Simon Simonian, a telecoms analyst at Dubai-based Shuaa Capital.

When he took the helm of Zain in 2002, Al Barrak spearheaded an aggressive acquisition drive in an attempt to turn the local mobile operator into a global company. It snapped up assets like Netherlands-based Celtel International for $3.4 billion in 2005 which gave Zain a foothold in the then underdeveloped Africa market.


Zain's acquisition spree emulated a wider trend among other state-run Gulf telecom operators flush with petrodollars who ventured abroad to nurture new sources of income as domestic monopolies ended.

Zain's strategy reversal started with last year's announcement of a strategic review of its Africa operations, two public attempts of selling the Africa assets and later a push by the Kharafi Group to sell a controlling stake.

Zain will now likely focus on cost cutting, improving efficiency and boosting income from data, one of the prime sources of revenue growth in the energy-rich Gulf region where penetration rates in some countries tops 100%, analysts said.

Proceeds from the sale of the Africa assets will also help prop up Zain's finances, analysts said. The company struggled to boost income in 2009 due to the global financial crisis, foreign exchange fluctuations and increased capital expenditure.

"We expect Zain will pay a dividend to shareholders, use some of the cash to invest in operations such as Iraq and Saudi," Al Mal's Ellam said. "They could potentially also lower their debt level."

Zain's Africa operations provided room for growth, but became a drag on earnings as investment costs rose and competition intensified, according to analysts.

"When they first entered Africa, there wasn't as much competition as there is now, especially from well financed international operators such as Vodafone, France Telecom and MTN," said Al Mal's Ellam.

Disappointing results from Zain's Africa operations contributed to the company's lackluster third-quarter performance, which included a 53% slump in profit from the year earlier due to higher financing costs and currency fluctuations.

While Africa users represented about 58% of Zain's total 71.8 million active subscribersat the end of September 2009, the Africa operations, excluding Sudan, only contributed to about 33% of its nine-month earnings before interest, tax, depreciation and amortization, according to analyst estimates.

"One of the drags for the company's net income has been the large depreciation charges from investments in Africa," said Sean Gardiner, an analyst at Morgan Stanley in Dubai

"This (Africa asset sale) deal could help net income to grow better."

Kuwait's Zain Faces Revenue Growth Battle After Africa Ops Exit

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