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Zain’s heady stake sale could disappoint

September 10, 2009

KENYA-TELECOMS/ZAINZain by name, zany by nature. A group of Indian telecoms companies and a Malaysian billionaire have promised to shell out an eye-watering $13.7 billion for 46 percent of the Kuwaiti telecoms operator, the Arab world’s third largest.

But minority investors hoping to cash out may have to think again. First, the offer has been engineered by — and for — the family-owned Kharafi Group, which is selling 20 percent of Zain, and its associates. Second, there’s no guarantee the deal will actually be completed.

Even Kharafi reckons it will take another four months to complete the sale, which involves the consortium paying 2 dinars per share, a chunky 45 percent premium over Zain’s current price.

There is also considerable uncertainty about who exactly some of the mooted buyers are. Little is known about India’s Vavasi Group or Malaysian billionaire Syed Mokhtar al-Bukhary, who have teamed up with Indian regional telecom companies Bharat Sanchar Nigam and Mahanagar Telephone Nigam.

The consortium has yet to spell out its plans to fund the purchase. And the Kharafis have yet to pool together the shares they need to reach 46 percent. 

All this creates additional uncertainty for Zain’s minority investors — including the Kuwaiti Investment Authority with 25 percent — who have watched Zain shares tumble from a high of almost 2.5 dinars in mid-2007 to a 0.64 dinar low in January, only to recover to 1.38 dinars on Wednesday.

The consortium says it wants to scrap the sale of the African business, which Zain has been trying to sell following a recent volte face in its M&A fuelled growth path.

Zain’s acquisition binge has left it operating in 24 countries, including Saudi Arabia, Iraq and Nigeria. While this foothold in some of the world’s least predictable but potentially high growth markets has made it a name on the telecoms stage, it has not come cheaply. Zain has spent more than $12 billion since 2005 on its African expansion alone.

But everything changed earlier this year when Zain when reined in spending and cut 2,000 of its 15,000 workforce. It also tried, so far unsuccessfully, to sell a majority stake in its African operations to French entertainment group Vivendi, which has since ruled out reviving the failed talks.

Speculation about an outside investor has helped drive the recent recovery in Zain’s share price. If nothing else, the proposed stake sale could flush out buyers for either the whole group or its African assets. Maybe that’s just what the Kharafis are after, but it’s a high-stakes gamble.

Given the questions about the consortium and the apparent differences between the Kharafi clan and Zain’s management, there’s plenty of scope for investors to be disappointed.

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