Time to hang up

Etisalat/Zain: Emirates Telecommunications' tentative offer for Zain has called time on the Kuwait-based telco’s independence.

It was only two years ago that Zain had a grand ambition to be a top-10 global operator. The so-called "ACE" strategy was to accelerate, consolidate and expand. Having sold its African operations to India's Bharti Airtel for $10.7 billion earlier this year, and with Etisalat offering at least the same again to control what's left, Zain looks set to be consolidated - not a consolidator.

The details of Etisalat's approach are typically hazy. It says it has made a "preliminary conditional offer to buy a stake in Zain". Etisalat wants to acquire 46 per cent of the free float, according to people familiar with the situation. That would amount to a majority, given Zain holds 10 per cent of its stock in treasury. The total cost might be roughly 25.6 billion dinars ($11.8 billion) at the mooted price of 1.7 dinars per share, a reasonable premium of 35 per cent to Zain's last closing price.

Etisalat already operates in 18 countries. A deal would cement its position as a leading telco in the Middle East and get more exposure to less developed markets like Sudan and Iraq.

At that mooted price, Etisalat's offer is unlikely to meet much resistance. Bankers say that the Kuwaiti family conglomerate Kharafi - which has half Zain's board seats - has agreed to sell its 13 per cent stake to Etisalat. Uncertainty over the family's shareholding and commitment to the group helped spark the resignation of Zain's chief executive of eight years just prior to the deal with Bharti. While the Kuwaiti government also owns almost 25 per cent of Zain, the shareholding is passive and the state is known for its relaxed attitude to foreign takeovers in the telecoms sector. Just take Qatar Telecom's acquisition in 2007 of a controlling stake in National Mobile Telecommunications Company for almost $4 billion. But the Kuwait government would probably rather stay on board as a minority investor than sell out.

To ring home with good news, Etisalat needs to win over just 15 per cent of the remaining shareholders. That shouldn't be too hard. And with the backing of the United Arab Emirates government, a 60 per cent shareholder, Etisalat appears to have the financial resources to realise the grand ambitions that Zain hung up on.