Saudi Arabia: Mobile moves

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Saudi Arabia’s third-largest mobile phone service provider appears set for a change of leadership as Zain, its Kuwait-based owner, bows out after four less-than-profitable years.

In early April, Zain announced it had agreed to sell its 25% stake in its Saudi unit to joint bidders, the Kingdom Holding Company and the Bahrain Telecommunications Company (Batelco). The deal, worth between $950m and $1.2bn, is still subject to due diligence and further negotiations.

The change in ownership structure has been a long time coming, with the sale first mooted last October and a number of leading regional telecoms providers named as possible contenders for the stake in Zain Saudi. Among them were Telecom Egypt, Qatar’s Qtel and Saudi firm Etihad Atheeb Telecom, which operates WiMAX internet services domestically, as well as Bahrain's Batelco.

One of the original driving forces behind the Zain Saudi sale was a bid from the UAE’s Emirates Telecommunications Corporation (Etisalat) to take a controlling stake in the Zain Group. With Etisalat already present in the Saudi Arabian market, through the hand-held service provider Mobily, divesting its Saudi operations was a prerequisite for Zain if it wanted the $12bn deal to go ahead.

However, while the Zain-Etisalat transaction was ultimately abandoned – with Etisalat citing divisions among members of Zain’s board and delays in the due diligence process among other reasons for withdrawing its offer – the Kuwaiti company decided to continue with its plans to disconnect from the Saudi sector.

According to Prince Alwaleed bin Talal bin Abdulaziz Al Saud, the chairman of Kingdom Holding, it could take three months or more for the due diligence process and associated procedures to be completed and the sale closed.

“We started thorough studies of all Zain Saudi books and papers, which will take up to about a month, or a month and a half,” Prince Alwaleed told the media on April 24. “If things go well, we expect the completion of purchasing Zain Saudi from Zain Kuwait in the two months that follow.”

Market analyst Irfan Ellam, of Al Mal Capital in Dubai, sees the sale as a sound move, with both Kingdom Holding and Batelco bringing solid assets to the table.

“Kingdom Holding is a good fit because they know the Saudi business landscape”, Ellam told UAE daily The National on 8 April. “What Kingdom doesn’t have is experience [in the telecommunications sector], which is where Batelco comes in.”

The planned sale comes at a time when the Saudi telecommunications sector is, according to analysts, performing below expectations. In late April, all three operators posted their first-quarter results, and while Mobily saw its profits lift by 40% compared to the same three-month term last year, this spike was still marginally less than many had been looking for. Mobily profits reached $265m in the opening quarter of 2011, just under the $267m experts had expected for the company.

Although it was below projections, Mobily’s performance was better than that of its main rival, Saudi Telecom (STC), which recorded an 11% fall in net profits across the quarter, down from the first-quarter 2010 figure of $472m to $419.5m. This decline was despite the company increasing quarterly revenue by 4%, with total earnings coming in at $3.4bn. STC officials attributed the weaker results to additional salary costs stemming from a royal decree for employee bonuses in the public sector and government-controlled companies.

Like Mobily, Zain Saudi also posted a sizeable increase in its first-quarter revenue, up 6% on its results for the same period in 2010. Its $395m earnings still left it well in the red, however, with the company reporting losses of $141.9m for the first quarter of 2011. While a far stronger performance than the $176m loss in the first quarter of 2010, it shows that Zain Saudi is struggling to dent the market dominance of STC and Mobily.

When they take over the helm at Zain Saudi, Kingdom Holding and Batelco are likely to look at what further investments will be required to enable their new venture to better challenge the more established operators and to move it to profitability. The domestic market is already close to saturated, with mobile penetration rates of around 175% in 2009, according to the International Telecommunication Union. This means there is little opportunity to sign up new subscribers and leaves soon to be rebranded Zain Saudi with the option of rolling out more products than its competitors or slashing prices to woo clients away from STC and Mobily. Both of these strategies would be likely to eat into earnings, however, at least in the short- to medium-term.

Kingdom Holding and Batelco may not have an alternative to such high-risk moves if they want to start accumulating users and ensure that their joint asset turns a profit.

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