Zain Saudi attractive despite debts and mounting losses, rival bidder Batelco also has cash required
Saudi investment group Kingdom Holding looks set to win the
fight for a key stake in Zain Saudi, good news for its stressed balance sheet
and for telecoms competitors who may fear a more hands-on owner.
Kingdom, owned by Prince Alwaleed bin Talal, nephew of the
Saudi King, faces a rival bid for a one quarter holding in the debt-troubled firm
from Bahrain Telecommunications Co (Batelco).
Both offers expire on Wednesday, but the bidders for a stake
in the number three Saudi operator have an option to extend.
A $12bn takeover of the stake's present owner, Kuwait's Zain,
by UAE-based Etisalat depends on the sale.
An investment consortium led by Al Riyadh Group has also
made an offer, but Zain said no price was stated and the group's backers remain
All the bids are secret.
Alwaleed, also a Citigroup shareholder, has the firepower to
ease the stresses on Zain Saudi's balance sheet. The firm has been in talks
with lenders after missing some commitments last year on a two-year $2.5bn Islamic
"Kingdom Holding and Batelco are completely different
bidders - Kingdom would likely be a financial investor, whereas Batelco would
probably want management control," said Kunal Bajaj, HSBC telecoms
"The buyer has to be financially strong from a balance
Zain Saudi has racked up mounting losses since launching
services in August 2008 and has an estimated $3.9bn of debts, with buyers
likely to take over any debt guarantees held by parent Zain. Analysts disagree
over whether these debts would have to be refinanced if the guarantor changed.
"Kingdom would be positive for Zain Saudi's financing
options," Bajaj said. "Kingdom offers royal family influence and also
holds stakes in a few banks, which could help to get longer-term financing for
Zain Saudi at lower interest rates."
Zain Saudi made a fourth-quarter loss of $138.9m and has
accumulated losses of $2.05bn, but for all its financial troubles, it offers
entry into Saudi Arabia's telecoms market, which is forecast to be worth
$15.5bn in 2011, up 4.2 percent from 2010. Zain Saudi has 5.2 million
subscribers and an 18 percent market share, according to a 2009 statement.
"Zain Saudi can probably be improved over the medium
term and there are only three domestic [mobile] players, which is few enough to
allow a third player to make money," said Richard Barker, Credit Suisse
Zain Saudi had revenues of SR5.9bn in ($1.57bn) 2010,
placing it a distant third behind Mobily's SR16bn and former monopoly Saudi
Telecom Co's (STC) SR51.8bn, although the latter operates in 10 countries.
Kingdom, which has vied unsuccessfully for a telecoms
licence in Saudi Arabia before, may be hampered by a lack of operational
expertise. This is where Batelco has the upper hand, but analysts are worried
it lacks the financial strength to take on Zain Saudi's debts.
Batelco is one of the Gulf's smallest telecoms firms, with a
market capitalisation of $1.9bn, an estimated cash balance of $230m, and a
debt-free balance sheet.
"The company would benefit from synergies driven from
its existing investment in the Etihad Atheeb," Diala Hoteit, NBK Capital
telecoms analyst, wrote in a research note. We remain cautious on Zain Saudi
Arabia's current debt profile, which may prove to be an added burden to
Batelco holds a 15 percent stake in Saudi fixed-line
provider Atheeb Telecom.
Although the offers are undisclosed, Zain Saudi is valued on
the stock market at $3bn and a 25-percent stake at $750m.
Bids are likely to be at a discount to Zain Saudi's share
price of SR8.05 because of its debt burden, said Hesham Tuffaha, Bakheet
Investment Group head of research in Riyadh, and priced nearer its book value
of 4.3 riyals per share. But Irfan Ellam, Al Mal Capital telecoms analyst, said
the operator would still command a premium.
"I doubt any offer below the market price would
succeed," he said. "This wouldn't be a strategic investment for
Kingdom, so it could sell a stake to a telecoms operator in a few years."
Other bidders could yet enter.
Zain Saudi chief executive Saad al-Barrak is trying to put
together a consortium to buy Zain's stake, sources said in January, while Qatar
Telecommunications (Qtel) has said it is watching events closely.
"Kingdom Holding's offer finally put Zain Saudi into
play and I thought it would draw out other bidders -- I wouldn't be surprised
if there were more to come," said Al Mal's Ellam.
STC and Mobily, a unit of Etisalat, could yet raise further
the competitive pressures in the Saudi mobile sector. They have plans to sell a
large stake in a combined $2.5bn merged towers business, a deal that could cut
costs for both operators.