UAE's Emirates Telecommunications Corp (Etisalat) offered to buy a stake in Kuwaiti telco Zain, potentially propelling Etisalat into high growth markets in the Middle East.
Speaking to Reuters on Wednesday, Ahmed bin Ali, spokesman, Etisalat, said: "Etisalat has submitted a preliminary conditional offer to buy a stake in Zain."
Analysts, however, said the deal could face regulatory hurdles in key markets such as Saudi Arabia, where both Zain and Etisalat compete for market share.
Speaking to Reuters, Naser al Nafisi, general manager, Al Joman Center for Economic Consultancy, Kuwait, said: "There is a sensitive point, which is Mobily in Saudi belongs to Etisalat, and Zain Saudi belongs to Zain. I don't know how Saudi's telecom authority will accept this - one owner for two operators."
In Saudi Arabia, Etisalat is the largest shareholder in Etihad Etisalat (Mobily), which competes with former state controlled monopoly Saudi Telecom (STC) and with Zain Saudi Arabia.
A source close to the deal said Etisalat offered major shareholder the Kharafi Group 1.7 dinars ($5.97) per share for its stake.
He said: "The offer was made to the Kharafis."
Earlier, CNBC Arabiya TV channel reported that Etisalat had made the 1.7 dinars per share offer for a 46 percent stake in Zain, which would come to just under $12 billion.
Mohammed Ali Yasin, chief investment officer, CAPM Investments, Abu Dhabi, said: "The initial reaction of some investors is that 1.7 (dinars) is a bit on the expensive side, but I am sure Etisalat have made their calculations and realised they will be gaining some."
Zain, the Gulf Arab region's third biggest telecoms firm, said its management had not received an official offer.
Another news channel, Al Arabiya, said National Bank of Kuwait was an adviser to Etisalat, and BNP Paribas was advising the Kharafi Group.
Kuwaiti family conglomerate Kharafi owns a 12.7 percent stake in Zain through one of its units, according to bourse data, but analysts estimate Kharafi's stake to be around 20 percent through other firms it controls. The Kuwaiti government owns 24.6 percent in the company.
The group has been attempting to sell its stake in the operator for over a year to raise liquidity.
Nafisi said: "They have strong incentive to sell, and I believe this is a very attractive price," adding that the stake would be auctioned according to Kuwait bourse regulations, and he doubted any investor would pay more.
The deal could be bad news for Zain's minority shareholders if they lose influence to a controlling shareholder.
Nafisi said: "Forty six percent is a control share because the Kuwaiti government that owns 24 percent is silent by nature, and the rest of the owners are fragmented."
Shakeel Sarwar, head of asset management, Securities and Investment Co (SICO), Bahrain, said: "Kuwait doesn't have M&A regulations in place to protect the rights of minority shareholders. If they do (sell), then Zain's share price could collapse after the deal."
Zain shares closed up 7.9 percent at a four month high of 1.36 dinars on the Kuwait bourse.
Etisalat, which operates in 18 countries including Egypt and India, but derives 85 percent of its income from domestic operations in the UAE, is among Gulf telcos looking to expand overseas after losing their monopoly at home.
Its chairman expressed an interest in a 26 percent stake in India's Reliance Communications earlier this year.
The company has made acquisitions from Nigeria to Indonesia, but its only Gulf operation outside its home country is the mature Saudi Arabian market.
Shardul Shrimani, telecoms analyst, IHS Global Insight, said: "If the deal goes through, Etisalat will have exposure to high growth markets such as Iraq and Lebanon, which has in the past been of strong interest," adding it would also gain access to more stable markets in Bahrain, Kuwait and Jordan.
Zain offloaded its African assets earlier this year in a $9 billion deal with India's Bharti Airtel, with most of the proceeds distributed to shareholders.
Some Kuwait investment houses and merchant families, including Zain shareholder Kharafi, have been badly hit by the financial crisis and keen to offload assets.
Etisalat's shares were up 0.9 percent, slightly outperforming Abu Dhabi's bourse. (Reuters)For all the latest tech news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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