The adage “A picture is worth a thousand words” applies perfectly to the Zain deal signature picture above. Many people doubted the deal would go through even though there was a legitimate buyer, credit was available, and Zain desperately wanted to sell. Doubters had their reasons as Zain has failed to close several announced deals in the past. Moreover, Bharti had their share of failed takeover attempts as they recently failed to close the MTN Africa deal on two occassions. The picture above sets the record straight: Mr. Naser Al-Kharafi signing the Zain Africa sale with Mr. Sunil Bharti Mittal next to him and Mr. Assad Al-Banwan, Chairman of Zain, appearing too.
The final transaction implies an enterprise value of $10.7B with $9 billion equity and $1.7 billion assumed debt by Bharti. Payment will be in cash with $8.3 billion paid upon closing and US$0.7 billion paid after one year. Mr Asaad Al-Banwan commented on the transaction by stating: “This transaction crystallises the significant value we have created for our shareholders over the last 5 years.” Mr. Nabil Bin Salamah, CEO of Zain, shared his vision of Zain after the Africa sale by asserting: “The transaction allows Zain to focus on its highly cash generative operations in the Middle East and to substantially improve its balance sheet. We are excited about the growth prospects of the Middle East and we believe Zain is well positioned to capture this opportunity.” Mr. Sunil Bharti Mittal, Chairman and Managing Director, Bharti Airtel declared: “This agreement is a landmark for global telecom industry and game changer for Bharti Airtel. With this acquisition, Bharti Airtel will be transformed into a truly global telecom company with operations across 18 countries fulfilling our vision of building a world-class multinational.” This specific part reminded me of Saad Al-Barak’s (Zain’s previous CEO) thoughts of Zain’s prospects when Zain initially bought Celtel Africa.
So, now what? It is imperative to acknowledge that yesterday’s Zain is a completely different animal from the one we have today. With this sale, Zain has transformed from a growth company to a value company. This entails various things such as a lower assigned multiple (EV/EBITDA) and lower stock appreciation. On the other hand, you would be owning a more stable company with a lower beta for its dividends. Anywanys, I want to hear what you guys think of this deal and what it means for Zain, shareholders of Zain, banks, and Kuwait.
Below are previous articles pertaining to our thoughts on the Bharti deal:
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I think this is positive for the whole market as more liquidity will be injected; and it is a positive catalyst for Kuwaiti banks, specially NBK. Although Kharafi Group stocks have run up sharply, I don’t know if they have some more upside to them.
As for Zain, with its healthy balance sheet, I agree with you that its going to be a value rather than a growth company. Nevertheless, I think the current price of the stock is pricing in the news and I don’t think there is much upside to it. Also, I have a negative outlook on the Company’s main operation, Kuwait, as the market is fully penetrated and competition is raising.
On the other hand, Zain Saudi, which has more growth potential, will be an attractive stock if they resolve their debt issues.
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Mabrook !
Am still waiting for the Chinese Dinner !
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so would this be the final nail in the zain growth story’s coffin? did they succeed, did they fail? probably a bit of both considering the seemingly tidy profit they generated on that asset sale to bharti but i don’t think it was the initial plan they had.
so what’s next for kuwait? who/what carries the kuwait growth banner forward?
on a sidenote: its interesting that most successful companies in kuwait of considerable size have done so with hefty government aid and regulation (zain had a monopoly for years allowing it to hoard cash and profits, NBK ditto, KFH goes without saying, etc).
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Keynesian Reply:
March 31st, 2010 at 3:22 pm
I agree with you on most points. It’s a lucrative deal, but one has to admit they were lucky in that Bharti had the credentials and most importantly weren’t able to close their deal with MTN twice and were desperate.
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peteyb Reply:
April 1st, 2010 at 2:40 pm
on that note, M&A has been a chronically weak area for the arab region from what i’ve gathered. my guess is that this eventually has to change someday
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for mtc or “zain”, sudan and ksa are the most important countries (i was surprised that bharti didn’t insist on adding sudan)
I dont think it will turn to a value company just like that, all this time it had no profit growth anyways. they might get that now as they got rid of their troubling assets.
Kuwait is saturated and getting competitve (remains highest rev/min though)
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Keynesian Reply:
March 31st, 2010 at 3:35 pm
Zain’s model was based on revenue growth while taking a leap of faith that profit growth would follow. It didn’t. It eventually would, but Zain couldn’t invest more in Africa as they were limited by their exhausted balance sheet. For example, Nigeria is the single largest revenue source for Zain and contributes 21% of Zain’s earnings.
Kuwait contributes around 10% of revenues, but a nearly a whopping 50% of earnings. This is mostly because of the higher ARPUs (Average Revenue Per User) in Kuwait since most people use high margin value-added services such as internet, MMS, Video-calling, etc. With Viva joining the Kuwait arena, Zain lost considerable Kuwaiti revenue as it dropped charges for incoming calls from homes and lost customers.
Although Saudi (partly owned by Zain Kuwait) and Sudan may be considered growth opportunities, they are only a slice of the giant pizza Zain used to have.
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peteyb Reply:
April 1st, 2010 at 2:47 pm
“I dont think it will turn to a value company just like that, all this time it had no profit growth anyways.”
bo6air – i seem to be a bit lost with this statement of yours. value companies aren’t usually considered simultaneous growth vehicles since their valuations often reflect stable, predictable cash flows from solid business (in this case mobile operator franchises). now that Zain has jettisoned its ‘beautiful world’ of africa for a more reasonable world of dependable cashflow (not to be confused with growth in profits or revenues to a considerable degree) value investors will start to price it based on that and not on growth premiums.
considering that no one is expecting to fail or start making operating losses anytime soon, the most likely outcome is a value pricing for its stock. i haven’t done the homework on that number so i don’t know what it is.
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déjà-vu Orascom Telecom !
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Can you please explain more why u think it changed to a value company?
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peteyb:
what am saying is the following:
zain was overvalued. it was an expensive company all the way through, especially so after its flat profits (delining at times)
Now that they got ride of africa, they have better (more manageble “Growth” opportunities) in Sudan and KSA.
In KSA, STC will not sit ideal obviously nor will Etisalat, so its a challang there. But in Sudan, I think they may have something interesting there.
these two markets, should in theory at least, become its biggest markets, and they are both somewhat, low penetrated market with sizable populations.
(that is why I dont think it will become a value company)
Cash flow will remain no so dependable, I think and given its strong position in Kuwait, I think it has a fair chance against STC and Etisalat. But all in all, its a competitive market.
I might be worng of course!
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