Zain eyes US$12 billion sale of African mobile networks - Kuwaiti firm rethinks emerging markets strategy as Africa reports Q1 2009 loss

Zain’s announcement that it is reviewing a sale of its African mobile networks marks a major shift in strategy for a group that had previously seen the region as a major driver of growth. The Kuwaiti-based group had earlier set itself an ambitious target of becoming one of the top ten telcos in the world by 2011, targeting a total customer base of over 150 million. However, a sale of its African networks, which account for 16 of its 23 global markets and some 62 percent of its customers, would dramatically reduce Zain’s customer base and global footprint.

A divestiture would be even more surprising considering that Zain only acquired many of its African operations in 2005 (following its US$3.4 billion acquisition of Celtel) and in some cases has only just completed rebranding the networks. Zain’s most recent African market - Ghana - only launched in December 2008. Last year, as we reported in an earlier edition of Snapshot, the firm also moved to bring all the former Celtel operators under its ‘One Network’ initiative - a bid to create a single cross-border network that allows subscribers to move freely across geographical borders without incurring roaming fees.

However, Zain’s African businesses only contributed 10 percent of group profit last year and sunk to a net loss in Q1 2009, as the group struggled to turn many of its fast-growing networks into profitable businesses.

French media conglomerate Vivendi - which has numerous stakes in African countries such as Mauritania (Mauritel), Burkina Faso (Onatel) and Gabon (Gabon Telecom) via its control of Morocco’s Maroc Telecom - confirmed on 10 July that it was in talks to acquire Zain Africa, but announced earlier this week that it had broken off negotiations. Price appeared to be the main stumbling block; Zain’s African networks are valued at between US$10-12 billion and investors raised concerns that a deal with Vivendi would have over-leveraged the French firm. Ratings agency Standard and Poor’s had earlier put Vivendi on watch for a possible negative review if discussions with Zain had advanced. In Zain’s H1 2009 earnings - announced earlier this week - the firm remained bullish on the prospects of a sale despite Vivendi’s withdrawal, noting that it has “received expression of interest from several parties/other operators to acquire Zain operations in Africa.” The firm is expected to use proceeds from a deal to fund further expansion elsewhere in the world.

As our Q1 2009 data shows, Zain’s largest market in Africa is Nigeria, which is almost three times larger than Sudan, its second-largest market. However, Zain Nigeria is one of only five of its African markets where it is not a market-leader (MTN leads Nigeria with an estimated 40 percent market-share). Nigeria is Zain Group’s largest contributor of customers (23 percent) and revenue (18 percent), but revenue, earnings (EBITDA) and market-share all declined at the unit in Q2 2009.

The situation is more encouraging in Sudan, Zain’s second-largest African market (though reported as part of its Middle Eastern division). Revenue grew 14 percent over the year (to US$233.6 million), and EBITDA rose by 55 percent to US$128.3 million, the latter outstripping the larger Nigerian unit. Zain Sudan grew its customer base by 48 percent over the year; ARPU at the unit was US$14, the highest across all Zain’s African businesses with the exception of Gabon (Zain Gabon’s reported ARPU of US$24 was the second-highest in Africa in Q1 2009).

But Zain’s subsidaries in Sudan and Gabon are bucking the wider trends across Africa, where ARPU is among the lowest in the world and margins are tight. Prepaid connections account for 99.4 percent of Zain’s total in Africa, reflecting the cash-based nature of most economies in the region. Only Zain Kenya boasts a significant contract base. Total connections growth in the region also appears to be slowing. Total connections at Zain Africa (excluding Sudan) grew 36 percent in the year to Q1 2009 (compared to 55 percent between Q1 2007 and Q1 2008). This means that Zain Africa is now reporting slower growth than at its Middle Eastern division (including Sudan), which grew by 50 percent over the same period.

Matt Ablott, Analyst, GSMA Intelligence:

Zain may be operating in African markets with plenty of room for future subscriber growth but low ARPU and shrinking margins are clearly a concern in the short term. Management issues, negative currency fluctuations, and political instabilities across many of its markets also appear to have been factors in Zain Africa posting a loss in the first-quarter. Nevertheless, Zain’s debt-to-equity ratio is relatively healthy considering its rapid expansion over the last few years; this makes it unlikely that Zain will consider a fire sale or the temptation to sell off the operators individually. The US$10-12 billion valuation on the business – which equates to around US$250 per subscriber - seems reasonable, but many potential suitors could struggle to fund a deal in the current credit climate. The price tag was clearly a factor in Vivendi walking away from the deal and the pool of other candidates for whom the business would make strategic and financial sense seems limited. India’s Bharti would be a credible contender but it is already locked in merger talks with Zain’s African rival, MTN. This leaves Essar Group – a major stakeholder in Vodafone Essar - as the most likely Indian bidder. Other possibilities include rival Middle Eastern operator Etisalat, China Mobile (the world’s largest mobile operator in terms of subscribers) and Cable & Wireless.