Why Etisalat’s move for Zain makes sense

UAE operator Etisalat’s offer for a 46 per cent stake in Zain is a move that makes a lot of sense in terms of advancing Etisalat’s own expansion plans, according to analysts at Informa Telecoms & Media.

Several of Zain’s units are very successful and attractive assets, and since the disposal of its African operations, are now almost entirely based in the Middle East, which is also Etisalat’s home region. Furthermore, Zain’s footprint is largely complementary to that of Etisalat, with only one important overlap in Saudi Arabia.

The case for consolidation among the big Gulf operators has been building for some time, said Matthew Reed, senior analyst at Informa. But with each player having similar objectives of building themselves into major players in the Middle East and beyond, there wasn’t room for all to succeed. “Zain was the most ambitious of its peers but it was also the first to blink, with its grand expansion plans unravelling over the past year or so, leading to the sale of the Zain Africa operations to Bharti Airtel,” Reed said.

If Etisalat’s offer is successful, the UAE operator will be able to add Zain’s market-leading operations in the high-growth markets of Iraq and Sudan (Etisalat does already have a presence in Sudan through CDMA operator Canar, but it has been unsuccessful in its quest for a GSM licence), as well as those in Bahrain, Jordan and Kuwait, with a management contract in Lebanon and assets in Morocco.

But it is in Saudi Arabia that things get awkward, as both Etisalat and Zain already have subsidiaries in the country: Etisalat has a 26 per cent stake in second placed operator Mobily while Zain group has a 25 per cent stake in Zain Saudi Arabia. If Etisalat buys into Zain, the CITC – Saudi Arabia’s telecoms regulator – is expected to insist that Etisalat disposes of one of the two assets. Etisalat would almost certainly choose to sell Zain Saudi Arabia, which could be of interest to MTN, for example, as the South African group has been thwarted in a number of its recent M&A ventures, including takeover talks with Orascom. Qatar’s Q-tel might also be interested in Zain Saudi Arabia.

“If Etisalat is successful in its bid for Zain, the UAE operator will also be propelled up the operator-ranking tables. Leaving aside Zain Saudi Arabia, a combined Etisalat and Zain group would be the world’s nineteenth largest mobile operating group in terms of total subscriptions, with about 138 million subscriptions, and the twenty-fifth largest in the world in terms of proportionate subscriptions, with about 62 million subscriptions,” Reed said.