After almost a year-long effort to sell the company as a whole or in parts comes the determined Sunil Mittal of Bharti Airtel Ltd with his deep pockets and ambitious plans to finally capture Africa. It’s a nice story that all we beaten down investors want to believe, for sure there’s the unquestionable interest, but what assurance do we have that it will go through? Sadly none.

Kuwait’s Mobile Telecommunications Co., or Zain, and India’s Bharti are set to hold exclusive negotiations until March 25^th and by then the final decision will be made. There’s no guarantee the transaction will be consummated, as it remains subject to due diligence and regulatory approval.

It’s worth mentioning that the unsuccessful fate of the Bharti-MTN deal was a result of regulatory hurdles set by the South African government’s treasury. According to sources, the South African government’s pension fund, Public Investment Corp, holds a 21% stake in MTN, where the government was under intense pressure to not give a go-ahead to the deal on concerns that MTN’s South African identity, post the deal, would be lost. The treasury insisted that for the deal to go through, the potential merged company should remain domiciled in South Africa and should be listed in both companies, something that was not a possibility under existing Indian laws.

While there seems to be no regulatory threats in Kuwait, shareholder concerns at both Bharti and Zain create obstacles and could yet stop the deal. In India, there is  the concern of overpaying as Bharti’s stock price plunged in the last trading sessions breaking support levels. In Kuwait, there is the notion of strategic divergence and the threat of unattractive growth going forward. Not to mention the Zain-Nigeria controversy following the announcement of Econet’s CEO Strive Masiyiwa that Bharti Airtel’s acquisition of Zain’s African assets must exclude the Nigerian unit until an ownership dispute with Econet Wireless Holdings Ltd. is resolved. Zain-Nigeria is an important part of the deal, as it accounted for 16% of group revenues in the nine months to 31 September 2010.

The promising and attractively low penetration levels across Africa (30-50%) might make the deal for Bharti a value trap as Zain has been struggling to deliver value to its shareholders with a 65 million subscriber base that only contributed 15% to the groups net profit. Africa still needs a lot of capital investment as competition intensifies and the average revenue per user (ARPU) has been falling. For example, Nigeria saw ARPU fall by one-third, while revenue and EBITDA drop 17% on a year-on-year basis. Similarly, DRCongo saw ARPU fall from $11 to $8 as a result of higher usage tax and a local recession, with revenues and EBITDA falling 13% and 14% respectively.

Its official! The National Investments Co. (NIC) just informed the Kuwait Stock Exchange (KSE) of the imminent sale of a majority share in Zain. We had posted about the rumor yesterday. Below is a translation of the clarification sent to the KSE:

“Kuwait Stock Exchange (KSE) announces that the NIC has been informed that a client of one of the funds under management (Al Khair National for Stocks & Real Estate Co.) is on the verge of selling a 46% stake in Zain for a price of KD 2/share inclusive of all commissions. Moreover, NIC will inform the KSE of any updates.”

For clarification purposes, please note that Al Khair National for Stocks & Real Estate Co. is a private company owned by Al-Kharafi family. In addition to various stakes in listed companies, it directly owns 11.05% of Zain and 68.6% of NIC (as of Sept. 7th).

We usually don’t post rumors until a story is confirmed, but since the rumors on Zain have been the single largest driver of the whole market, this will be an exception.

At the beginning there was talk about a strategic partner buying the African operations, then rumors that a couple of investors are interested in buying a majority stake in the mother company, Indian Bharti then UAE Etisalat; but Etisalat recently denied their interest in the acquisition and we may have finally reached the end of the Zain saga.

Today, a strong rumor emerged that the Abu Dhabi Investment Authority (ADIA) and an Indian Co. are in agreement with majority shareholders (Kharafi-led consortium) to buy a 46% stake excluding treasury shares at a deal price of USD 13.8 billion which translates into KD 2.000 per share. Zain shares closed up 5.40% at KD1.580 today. Further, Kharafi’s National Investment Co. will manage the sale. Please note that Zain has treasury shares equal to 10%. Thus, a sale of 46% is indeed absolute majority based on a float of 90%.

“The Abu Dhabi Investment Authority (ADIA) is a sovereign wealth fund owned by Abu Dhabi, United Arab Emirates. ADIA has never published how much it has in assets. As a result of this, there is some debate on how much the fund has under control. Accepted estimates have been between $650 billion to approximately $875 billion in assets.” (Wikipedia)

I feel heartburn bursting from deep inside me. It just pisses me off whenever individuals/companies act unethically simply because they are not breaking any law (obviously because there aren’t any laws in Kuwait!). Now what’s going on with Zain goes beyond heartburn and makes me want to puke. Why? The most prominent company in the KSE is up nearly 100% and we DON’T know exactly why or what’s going on. One day it want to become one of the top 10 companies in the world. The next day it reverses its stance and wants to sell its potentially most lucrative African region. And the following day rumors emerge that the majority of the company will be sold to Etisalat (UAE)! Meanwhile, the stock continues its rise and, well, someone big starts to sell big:

According to Bloomberg data, AL KHAIR NTL ST & REAL (Kharafi Co.) sold 76,531,883 shares as of 8/17/2009. This brings their holding down from 13.35% to 11.15%. If the stock wasn’t a screaming sell just like alpha dinar has been recommending, why would THEY sell?! Anyways, in our Islamic tradition divorce is sealed by repeating “Divorced” three times. I am now officially divorcing Zain by stating “SELL SELL SELL” three times!

1st Sell:

Operationally speaking, Zain is in a corner. From an aggressive acquirer to a helpless seller, Zain’s fortunes have dramatically changed. “It’s a wonderful world” Zain’s commercials repeats, but financial statements say the opposite. The company is heavily indebted, facing fierce competition, and its management wasted half its 4.5B capital raise on expensive share buybacks. The introduction of Viva in Kuwait is pressuring the company’s earnings (more than 50% of Zain’s net income is from Kuwait). With the ability to transfer numbers between providers coming soon, this will only add insult to Zain’s injuries. As for selling Zain Africa, it will be an operational blow for the company. Zain Africa’s EBITDA CAGR growth is supposed to yield 26.2% between 08-10. If they sell it, Zain shareholders will be stuck with mature competitive GCC markets which will warrant a low multiple.

2nd Sell:

Valuation. Valuation. Valuation! The stock is expensive whether compared to its historical P/E, regional, and/or international peers. Mind you the company is supposedly downsizing (selling parts), so its P/E should be lower due to the declining nature of its growth levels. What will they do with the proceeds? Grow or pay down debt? Its obvious. Its as simple as this: the share price already MORE THAN reflects the optimal scenario of selling the African operations for a huge premium. I’m not alone in this as all most recent sell-side analyst reports agree: HSBC rates Zain as (Underweight with a target price of KD 1.100), Shuaa Capital rates it as (Sell “KD 1.070″), and Bank of America/Merrill Lynch rates is as (Underperform “KD1.180″). Even Al-Khorafi is selling..

3rd Sell:

Some investors are thinking: what if Zain sells a majority interest to Etisalat for KD2, KD3, or even KD4. That is definitely a risk worth taking, right? WRONG. If Zain sells a majority interest, minority shareholders will not get KD2, K3, or even dream of KD4. ONLY the majority sellers (in this case a consortium of Khorafi-KIA) will reap the rewards! Remember Wataniya Telecom? A majority interest was sold to Qatar Telecom by shareholders led by Kuwait Projects Co. for KD 4.600! At the close of trading on the day the deal was sealed, Wataniya Telecom was trading at KD 3.020- which translates into a KD 1.580 difference. Majority shareholders of Wataniya earned a more than 50% greater return than minority shareholders!

I know what you are thinking- life is unfair. Wake up from your euphoria Zain minority shareholders and SELL SELL SELL..

Whatever it is driving the stock up is just making it more expensive! Zain is considered the most expensive Telecom stock, valued at EV/EBITDA of 7.32x against the GCC aggregate of 5.83x and MENA aggregate of 5.59x. Please look at the table below for more details.

On the other hand, technically speaking the stock has broke its resistance of KD 1.200 and its 20, 40 and 200 day moving average and it seems like there is no place else to go except the KD 1.700 levels.

Nevertheless, I would still be a seller…