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Why Zain sold its business in Africa

By Adekunle Adekoya
ZAIN Group (Mobile Telecommunications Company of Kuwait ) may have decided to sell its Africa operations as a result of growing financial difficulties, if indications are anything to go by.

Last week, on March 30, Zain signed a “definitive agreement”to sell its Africa business, Zain Africa BV to Bharti Airtel of India, in a deal which did not include operations in Arab Africa, Sudan and Morocco. Bharti, owned by billionaire Sunil Mittal, agreed to buy Zain’s businesses in 15 African countries for $9 billion in cash. In addition, Bharti will assume $1.7 billion of Zain’s debt under the deal. Zain said it signed “definitive agreements” to sell 100 percent of Zain Africa BV, which excludes its operations in Morocco and Sudan.

Zain chairman, Asaad al-Banwan, in a statement to the Kuwait Stock Exchange March 31 said its full-year profit declined 39 percent, a development he blamed on the global financial crisis which was said to have reduced demand for telecommunications services in some African countries.

Net income last year fell to 195 million dinars ($675 million) from 322 million dinars in 2008, Zain said in the statement.

“Last year was the most difficult, not only for Zain group but for everyone,” al-Banwan said in the statement, adding “the group’s companies were working under the pressure of the global financial crisis, and a majority of markets were massively impacted by the consequences of the crisis, especially the African markets.”

Foreign currency fluctuations cost the group 38 million dinars, he added. At US$3.51 to one Kuwaiti Dinar, losses attributable to forex fluctuations stand at US$133.38 million.

‘Zain has overspent’
However, it would seem that Zain has been under pressure, as a result of its expansion activities in the last seven years which saw it transform rapidly from just 600,000 subscribers in its domestic market of Kuwait in 2002, to operating in 22 countries across Africa and the Middle East, with 52.8 million subscribers by the third quarter of last year, according to Informa Telecoms and Media’s World Cellular Investors Service.

A posting on financial news portal, Bloomberg.com quoted an analyst, Jassim al-Saadoun, head of Al- Shall Economic Consultants in Kuwait, who spoke on Zain’s operating results last week.

“The results are not surprising, the global crisis is one reason why Zain is in trouble. It also expanded too quickly which affected its financial structure. It needs to service its loans and paid too much for that expansion.”
Zain has also overspent, al-Saadoun said.

“The global crisis is almost over and if Zain waits two years, its assets will be more mature and its bargaining power stronger to sell more assets,” he said.
Al-Saadoun may be correct, for Zain executed an ambitious expansion programme under its former CEO, Saad Al Barrak who pushed through the acquisition of Celtel, but came unstuck with the global meltdown, which made the owners desire to sell the Africa business to generate liquidity as many of the units in the Africa business were not performing to expectation. Even the largest market, Nigeria, which holds the most promise for the group accounts for only about 15 per cent of revenue.

Saad Al Barrak is also reputed to be ready to dedicate resources in pursuit of company objectives and was said to have recently spent as much as $6bn for another operating license in Saudi Arabia.

The expansion of Zain’s network in major markets such as Nigeria, Zambia, Sudan, and Iraq also resulted in increases in fixed costs from depreciation and amortization, with the company being further burdened by increases in financing costs.

Exit of Saad Al Barrak
The need for liquidity thus spurred some of the company’s owners to forward options to generate cash by selling some its assets, hence the decision to put up Zain Africa for sale, an offer quickly taken up by Bharti Airtel, which had been looking for a foothold in Africa. Last year, Bharti had tried to acquire MTN of South Africa in a US$77 billion deal which did not succeed. To be able to sell Zain Africa however, the position of Zain’s chief executive and deputy chairman, who was the chief driver of the expansion programme, Saad Al Barrak, became untenable. In February, he quit Zain, and the following month the company was able to seal the deal with Bharti.

Zain to use money from Bharti deal on dividends
On conclusion of the deal with Bharti, Zain said it expects a profit of about $3.3 billion after settling debt and provisions. Group chairman, Al-Banwan added that the company’s sound financial and profitable position would see an exceptional distribution of a cash dividend of 170 fils for the fiscal year ending December 31, 2009, subject to approval at the AGM.

“The strength and durability of the financial position of the Group ensures the realization of such distributions, while the profits from the sale of Zain Africa will be used in support of dividends for the coming financial years, which are expected to not be less than the cash distributions for the current year,” he said

Al Barrak was succeeded by Nabeel Bin Salamah as Group Chief Executive Officer. Salamah said the outlook for the current fiscal year 2010 is positive.  “The best is yet to come for the Zain Group, especially in light of our strong financial position, which will help us make operational decisions in order to attain excellent future returns.”

“We will seek to seize any attractive investment opportunity, as well as focus on the markets in the Gulf and Middle East, which currently account for the largest proportion of revenue and profitability.”

Salamah more or less confirmed Zain badly needed the proceeds from sale of Zain Africa when he said that the Group’s overall strategy was to increase value to shareholders and that this was already borne out by the recent definitive agreement to sell Zain’s African assets.


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