Etisalat bid for Zain dealt a big setback

The Kharafi Group, a Kuwaiti conglomerate leading the deal has announced it has ended negotiations with the UAE operator.

Etisalat's $11 billion bid for a controlling stake in Zain has suffered a setback. AFP PHOTO/YASSER AL-ZAYYAT

A major shareholder in Zain yesterday dealt a serious blow to Etisalat's US$11 billion (Dh40.4bn) takeover bid, saying talks had ended after the UAE company missed a second deadline to complete due diligence.

An Etisalat spokeswoman declined to comment on the move, which was seen by some analysts as the death-knell for the bid for the Kuwaiti telecommunications company.

"Due to the expiration of the deadline given to Etisalat for the completion of due diligence of Zain, which was identified by the end of February, we declare an end to this under our commitment contained in us and Etisalat for the sale of 46 per cent of the capital of Zain," said the National Investments Company, a brokerage firm that is majority-owned by Kuwait's Kharafi Group, which is the second-largest shareholder in Zain.

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Etisalat offered to buy 46 per cent of Zain for 1.7 dinars a share last September, but the deal has been delayed by difficulties in completing due diligence, problems selling a Saudi Arabian subsidiary and lawsuits by one Zain board member who wanted to stop the buy-out.

The deal was already looking in doubt last week after two bids for Zain's Saudi unit were rejected and a top executive and shareholder of Zain cast doubt on Etisalat's offer. Zain then announced the departure of three top executives and unveiled plans to cut staff by 40 per cent.

Selling the Saudi unit was one of the main conditions to acquiring the Kuwaiti company. Etisalat already operates in Saudi Arabia under the Mobily brand and acquiring the Zain unit would not be allowed by the regulator.

Another potential problem for Etisalat's offer is Zain's proposed dividend payout. Sheikh Khalifa Ali Al Sabah, a major shareholder and board member, said Zain planned to issue a dividend worth between 190 and 230 Kuwaiti fils to its shareholders this year.

With more than 3.8 billion outstanding shares on the Kuwait Stock Exchange, this would substantially affect the valuation of the company.

Etisalat could adjust its offer price for Zain by Dh4.4bn if the Kuwaiti operator issues a dividend before the deal to buy the company is closed, said Jamal al Jarwan, the group chief investments officer at Etisalat.

If Etisalat cannot reach an agreement with Zain shareholders, it would strike a serious blow for the UAE operator's foreign expansion strategy, analysts said. "It limits their options," said Irfan Ellam, a telecoms analyst with Al Mal Capital.

"Etisalat would have to look at other geographies other than the Middle East because there's not much left here."