Zain’s African safari could be coming to an end

By Matthew Reed

All good things must come to an end, and it looks as if Zain’s African adventure might be drawing to a close. There is little doubt that Zain is considering the sale of its operations in sub-Saharan Africa, or at least of a stake in those operations.

Recently, an executive at Zain – which has moved its headquarters to Bahrain but is still listed on the Kuwait Stock Exchange and is 25%-owned by the Kuwait Investment Authority, a state investment fund – was quoted in a Kuwaiti newspaper as saying as much. That followed a period of two or three weeks in which Zain had declined to comment as speculation mounted about its plans in Africa, after reports that it had received offers for its units there from French media-and-telecoms group Vivendi, among others. Later last week, Zain released a statement to the KSE saying that it had appointed Swiss bank UBS along with other consultants to conduct a review of its strategy.

If Zain were to sell its operations in sub-Saharan Africa, it would fly in the face of the company’s stated strategy for the past several years. Zain’s acquisition in 2005 of Celtel International, which forms the main part of the group’s presence in sub-Saharan Africa, was a key step in the pursuit of its goal of becoming one of the 10 biggest mobile operators in the world by 2011. Zain undertook a huge and costly rebranding operation in Africa in August to replace the Celtel name with the Zain brand across the continent. Zain has also been talking up the prospects of further acquisitions in Africa, even as the recession has taken hold. Zain Africa CEO Chris Gabriel said in November that the group planned to make three or four acquisitions in Africa over the year ahead. The economic downturn was an opportunity to go shopping, according to Gabriel. So why might Zain be considering the sale of its operations in sub-Saharan Africa? The answer is that although Africa offers opportunities, it is difficult territory in which to operate. Zain’s African operations contribute almost half of the group’s total revenues and accounted for 40.07 million of the group’s 64.66 million subscriptions at end-1Q09. Zain Nigeria is the group’s biggest unit in terms of both customers and revenues. In 1Q09, it accounted for 23% of Zain’s customers and 18% of the group’s revenues.

But Zain’s African units are generally less profitable than its Middle East operations. Zain Nigeria recorded EBITDA of US$128 million in 1Q09 but made a net loss of US$63 million in the quarter, compared with a net profit of US$22 million in the same period a year earlier. Including Zain Nigeria, seven of the 15 Zain units in sub-Saharan Africa made a net loss in 1Q09. The largest net income among the sub-Saharan Africa units in the quarter was the US$13 million recorded by Zain DRC. Meanwhile, some of Zain’s Middle East units are recording substantial profits. In 1Q09, Zain Sudan recorded net income of US$120 million; Zain Kuwait, US$116 million; and Zain Iraq, US$54 million. (Zain counts its operation in Sudan as a Middle East unit. The network was not part of Celtel, and Zain is not expected to sell it as part of any sale of its African operations.) Although Zain Nigeria generated the largest revenue in 1Q09, the group’s second-, third-, fourth- and fifth-largest revenues were recorded by Middle East units: Iraq, Kuwait, Sudan and Jordan, respectively. There is one exception to Zain’s profitable performance in the Middle East: In 1Q09, the new Zain Saudi Arabia unit made a loss in EBITDA terms of US$86 million, and a net loss of US$201 million. But the unit launched only recently, in August, and the Zain group might reasonably expect that it can be developed into a business that makes substantial profits.

Zain is trying to improve the efficiency of its operations, especially those in Africa, under the banner of its new Drive11 strategy, which was unveiled in April. As part of Drive11, Zain Nigeria has signed a managed-services contract with Ericsson that will see the Swedish vendor take over the running of its network. Zain has reportedly been offered about US$10 billion for its sub-Saharan Africa operations, a considerable increase on the US$3.4 billion that Zain – then known as MTC – paid for Celtel International, though under Zain’s control Celtel paid a further US$1 billion for Nigeria’s V-Mobile in 2006, and Zain paid US$120 million for a 75% stake in Ghana’s Westel in 2007. And the combination of the difficulties encountered in Africa and the prospect of a reasonable markup on the price paid for Celtel might be enough to convince Zain’s management, or its shareholders, to go ahead with the sale. (The KIA is the largest shareholder in Zain, followed by Kuwait’s Kharafi family.) So what would Zain do if shorn of its African units? The executive who gave the interview to the Kuwaiti newspaper last week said that Zain would focus instead on fast-growing markets in the Middle East and Far East. That might not be easy, since opportunities in the two regions are becoming scarce.

Zain was in talks to take on the third mobile license in Iran, the fastest-growing mobile market in the Middle East. But in the past few days the Iranian authorities have reportedly terminated those talks. And Zain is almost alone among its peers in the Gulf in not having established a presence in any Asian markets. Batelco, Etisalat, Q-Tel and STC have already made investments in Asia. The prospects of Zain’s African operations under new management depend largely on who that new owner might be. Vivendi, which controls France’s No. 2 mobile operator, SFR, already has a presence in Africa through its majority stake in Maroc Telecom, which in turn has subsidiaries in Burkina Faso, Gabon and Mauritania. Maroc Telecom is also in the process of acquiring Mali’s Sotelma. In 2007, Vivendi was in talks to buy a stake of 30-35% in Oger Telecom, which controls Turk Telecom and South Africa’s Cell C, for up to US$3 billion. (In the end, it was STC rather than Vivendi that bought a stake in Oger.) Vivendi was also a founding investor in KenCell, the operator that became Celtel Kenya and then Zain Kenya. But Vivendi sold its 60% stake in KenCell to Celtel in 2004. And buying all the ex-Celtel operations would be a major undertaking. India’s Bharti Airtel and Reliance Communications are also reportedly interested in the Zain units, even though Bharti is in merger talks with MTN. The low-cost Indian operating model might be what is needed in African markets as they become more competitive. African operators must also extend their coverage of hard-to-reach and lower-income rural customers if they are to maintain growth rates.

China Mobile and Vodafone have also been named as possible buyers. For China Mobile, it would be an opportunity to make its debut on the continent, and Vodafone would be able to consolidate its already substantial presence.  Whether Zain will sell, and to whom, remains unknown. With exquisite timing, Zain put out a press release this weekend to publicize its sponsorship of the forthcoming Mandela Day concert in New York, on the occasion of the birthday of African icon Nelson Mandela. But it might be a mistake to take that as a sign of Zain’s long-term commitment to Africa, since the concert takes place on July 18.