Bloomberg News

Zain Fails Again to Sell Stake Amid Company Debt, Court Battle

September 29, 2011

Sept. 29 (Bloomberg) -- Zain Group, the Kuwaiti mobile- phone company that didn’t complete a $12 billion deal with Etisalat, failed to sell a stake in its Saudi unit, hurting efforts to cut debt as it fights a court annulment of its board.

Kingdom Holding Co., controlled by Saudi billionaire Prince Alwaleed bin Talal, and Bahrain Telecom Co. said today they won’t proceed with an offer to buy Zain’s 25 percent stake in Zain Saudi Arabia, the kingdom’s third-largest mobile-phone company by market value, for $950 million.

Kingdom and Bahrain Telecom “concluded that the terms and conditions as set out in its non-binding offer could not be met to its satisfaction,” they said in separate statements. “This follows a period of due diligence and discussions with Zain Group and other stakeholders.”

Emirates Telecommunications Corp., the United Arab Emirates operator known as Etisalat, in March abandoned plans to buy a majority stake in Zain. The Kuwaiti company sold most of its African assets last year to Indian billionaire Sunil Mittal’s Bharti Airtel Ltd. for $9 billion.

“We don’t see other buyers for Zain Saudi now, especially after the failure of two deals to sell it,” said Marise Ananian, a telecommunications analyst at Cairo-based investment bank EFG Hermes. “Due to the court ruling and the Etisalat deal failing, the stock’s been under pressure for the past months and could come under more pressure now.”

Zain Group fell as much as 4.1 percent, the sharpest drop since May 15 in Kuwait City trading, and was down 2.1 percent to 950 fils at 11:19 a.m. local time.

Board Decisions

A Kuwaiti lower court on Sept. 25 annulled all decisions made by Zain’s board and declared it illegitimate, according to attorney Rashed al-Radaan, a lawyer for former board member Sheikh Khalifa Ali Al-Sabah. Sheikh Khalifa, part of the country’s ruling family, sued based on a commerce ministry report that said “violations” occurred at a general assembly meeting.

Zain, also called Mobile Telecommunications Co., said the ruling will have no impact on its commitments and that the company will appeal.

Kingdom and Bahrain Telecom, known as Batelco, had agreed in principle to pay $950 million in cash for the stake in Zain Saudi. In addition, Zain Saudi would have paid $250 million of debt to Zain Group after the transfer of ownership, Zain Group said on March 16.

“When I first saw the offer, which didn’t guarantee loans owed by Zain Saudi, it was clear to me that the deal was not executable,” Sheikh Khalifa said by phone today. “The lenders surely wouldn’t approve transferring the guarantees to the purchasers.”

Narrowing Losses

Zain Saudi’s second-quarter loss narrowed as the company added customers, it said in July. It concluded refinancing 2.25 billion riyals ($600 million) of debt in April.

“Zain made it clear they didn’t want to keep the guarantees of Zain Saudi on their books after the deal takes place,” EFG Hermes’s Ananian said.

Prior to the Etisalat bid, attempts by Zain shareholders to sell a majority stake failed. In September 2009, Kuwait’s Kharafi Group, Zain’s second-biggest shareholder after the Kuwait Investment Authority, announced the signing of a preliminary agreement to sell a 46 percent stake in Zain, valued at $13.7 billion, to a group led by India’s Vavasi Group and Malaysian billionaire Syed Mokhtar Al-Bukhary. At the time, the sellers and buyers pledged to complete the deal in four months.

The latest proposed sale was a key step in Zain’s efforts to reduce debt, Ananian said. “We thought capital restructuring could’ve taken place as soon as the deal went through,” she said.

Zain’s stock, which has tumbled 38 percent this year compared with a 16 percent drop in Kuwait’s benchmark stock index, will “remain under pressure,” said Chandresh Bhatt, vice president for research at Global Investment House KSCC. “The market has taken this news negatively because this was a much-needed deal for Zain Group,” Bhatt said.

--With assistance from Dahlia Kholaif in Kuwait. Editors: David Risser, Robert Valpuesta

To contact the reporters on this story: Fiona MacDonald in Kuwait at fmacdonald4@bloomberg.net; Tamara Walid in Abu Dhabi at twalid@bloomberg.net

To contact the editor responsible for this story: Shaji Mathew at shajimathew@bloomberg.net


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