Zain news has little effect on industry

Zain has not made official comments on rumours that appeared in Kuwait's Al Qabas newspaper, which cited unnamed sources as saying Kuwait-based Zain was negotiating to sell its African operations to a French company.

Reports from the Middle East cite Vivendi as the potential suitor, though Al Qabas said other bidders had also expressed interest.

On Monday, 15 June 2009 AfricaNext said selling the African networks would go against Zain's ambition of becoming a top 10 telecoms company in the world by 2011, with 110 million customers and US$6bn in earnings before interest, tax, depreciation and amortisation.

Zain's networks were typically the market leader or a number two in most of its African countries, it had a wider coverage in population terms than any of its rivals, and was present in markets that should grow their revenues well over the next five years, AfricaNext said.

But some other numbers tell a more worrying story. Last year, Zain's African operations accounted for 65% of its subscribers and 56% of revenue.

But more significant is the negative fact that they absorb more than 75% of its capital expenditure, yet only account for 15% of net income.

While Zain's net income rose just 6% last year, if Africa had been excluded it would have been up 34%.

“For all the lofty subscriber numbers, African operations are arguably a drag on the group, at least for now,” AfricaNext said.

“Ultimately, the fact that Zain would even consider selling its Africa business points to heightened concerns about the deterioration of fundamentals in African mobile markets,” its analysts said.

Competition had intensified, tax levels had risen as tax holidays expired, the markets were capital intensive and African currencies had plunged against the dollar. By contrast, Zain's Middle Eastern operations had become more profitable, but required more capital.

Selling its African arm may be strategically questionable in the long term, as some operations including Nigeria were bound to perform better.

“In the short term, however, and assuming a good price — and US$12bn would be good — selling would help pay high short-term debt and let Zain maximise its returns by re-allocating capital expenditure to higher-profit operations in the Middle East and North Africa,” the report concluded.

Source: Business Day

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