opinion


Out of Africa

Zain may have to sell a portion of its portfolio, scuppering its plans to become a global player

Middle East and African carrier Zain may have to sell a substantial portion of its portfolio, scuppering its plans to become a top ten global player by 2011.

Seen for some time as the hot tip in the global mobile operator category, Kuwaiti carrier Zain (which has shifted its headquarters to Bahrain, although it remains listed on the Kuwaiti Stock Exchange) looks to have hit a serious roadblock. Early in July, French conglomerate Vivendi confirmed that it was in discussions to acquire Zain’s African portfolio.

Given the enthusiasm and conviction with which Zain had gone about building, branding and exploiting this portfolio, Vivendi’s admission—which came in response to sustained speculation—did not bode well for Zain. But the news, as July drew to a close, that Vivendi was withdrawing from the talks made things look even worse.

Zain’s progress to its current position, where it has almost 70 million customers, has been swift and purposeful—and characterised by a willingness to spend vast sums of money (most famously $6.1bn on the third licence in Saudi Arabia).At no point during its ascent has the firm been anything other than downright bullish about its plans to become one of the top ten operators in the world by a range of KPIs.

Now, however, things are different. In the wake of Vivendi’s mid-discussion confirmation, Zain issued a statement claiming interest in its African operations from a number of parties and indicating that it was reviewing its options in the region. This represented a complete change of direction and, according to some interpretations, an admission of failure.

Zain’s much publicised ‘3x3x3’ plan, launched in 2003 and built on three, three-year steps, was intended to see it become a strong regional player by end 2005, a strong international player by end 2008 and a top ten global player by end of 2011. The disposal of its African operations might not so much set this plan back as derail it altogether.

Just prior to the carrier’s admission that it was conducting a strategic review of its African operation, a Zain spokesman told telecoms.com that such a move would not make sense given the 2005 Celtel acquisition and the costly rebranding exercise that Zain carried out last year. In light of the firm’s more recent admission, however, this statement tends to indicate that the situation has become urgent as, even despite these investments, retention is not the most attractive option.

Observers have noted that Zain may have little choice but to sell its African portfolio, or seek co-investors to take it forward. While it’s fearless spending created an aura of invincibility around the company, the financial reality is otherwise. Zain is routinely described as “highly leveraged” and, while analysts note that it has good cashflow, the firm looks unable to shoulder its debts any longer.

Results for the three months to end March 2009 show that the Sub-Saharan African segment of the firm’s portfolio made a loss of $4.95m, down from a profit of $127m for the same quarter in 2008. The Middle Eastern properties (with the exception of Saudi Arabia) all turned profits, meanwhile, with the leaders Sudan (counted with the Middle Eastern portfolio by Zain, and not part of the Celtel acquisition) recording net income of $120m for the quarter, Kuwait US$116m and Iraq US$54m.

The low spending markets of Africa are clearly more difficult to exploit than the wealthy Middle Eastern states, and, despite Zain’s trumpeted One network—which offers roaming throughout its African footprint at no extra cost—it looks like Zain’s margins are insufficient. “The real numbers of Zain will suffer this year,” said Dr Sultan A. Bahabri, chairman of MEA carrier and MVNO Hits Telecom, speaking to MCI in June. “The One network was a good idea but it didn’t make any more money for Zain, and it didn’t bring any more subscribers.” He also said that Zain had been in discussions with Vodafone and China Mobile prior to the Vivendi revelations.

Zain itself has always said that it is open to discussions with other carriers and investors on pretty much any topic, and is usually involved in talks of one form or another. Likewise, the firm has said previously, it is constantly running simulations on mergers and acquisitions.

There are alternatives to a straightforward sale, with some kind of share-swap chief among them. In May this year the carrier engineered a deal that saw the ownership of Zain Jordan given over to Palestinian operator Paltel in exchange for Zain being granted 56.53 per cent of the Palestinian player. A similar deal could be used to position Zain for further expansion in more developed markets—the end game of its 2003 expansion plan.

But the price has to be right and the $12bn tag that was widely reported as being placed by Zain on its African portfolio was apparently too rich for Vivendi. Like many other operators, Zain embarked earlier this year on a cost-cutting programme. Dubbed Drive11, in reference to the year in which Zain’s global top ten ambition is scheduled for achievement, the programme centres on a 13 per cent reduction in the firm’s workforce, which will see 2,000 jobs axed across the entire portfolio. In Nigeria, the firm’s largest market by subscriber numbers, Zain has signed a network management deal with Ericsson, which might yet be replicated elsewhere in the portfolio. But to save the African operations of aspiring top ten carrier Zain, this might be too little too late.

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One comment

  1. Albert Chigoga 01/09/2009 @ 1:37 pm

    It is absolutely viable a decision to sell an entity that is failing to generate the much needed revenue but selling it for the sake of it, is to say the least, a shot on the foot.

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