Historic deal still up in the air

As soon as a proposed bid for the Kuwaiti telecommunications operator Zain was announced, the doubts began.

The takeover of the Kuwaiti telecoms company Zain by an Indian-Malaysian consortium, valued at $13.7 billion, would make it the largest foreign takeover of a Middle-Eastern company.

History will be made in several ways if Zain is successfully acquired by the Indian-Malaysian consortium that announced its plan to buy the mobile phone operator at a press conference in Kuwait City last week.

The proposed deal, valued at US$13.7 billion (Dh50.32bn), would be the largest foreign acquisition of a Middle-Eastern company. It would also mark the first time that the largest member of a Gulf stock market had been bought out and would be the region's biggest telecommunications deal. The telecoms industry is used to breaking records. In 2000, the UK's Vodafone Group made the biggest company takeover in history, buying Mannesmann of Germany for $180bn.

Vodafone, whose aggressive decade-long acquisition spree is now coming to an end, also made the largest emerging-market telecoms deal in 2007, when it paid $11bn for a 67 per cent stake in the Indian company Hutch Essar. The purchase of Zain could exceed that price, but may not keep the record for long. Bharti Airtel of India has offered $14bn in cash and stock for a 49 per cent stake in MTN, Africa's largest mobile operator. Some MTN shareholders say Bharti will have to increase the offer if it wants to succeed.

But there are many steps needed before Zain and its acquirers can break records. As of today, it is unclear where the money for the acquisition will come from, who has actually committed to the consortium of buyers, and who owns the 46 per cent of Zain that would be sold. The stock market has reacted sceptically to the proposed deal, with Zain's shares down by 18 per cent since it was announced. The leading partner of the consortium, the Indian company Vavasi Group, said more detailed information on the purchase would become available in the coming weeks. Vavasi, based in New Delhi, has a low profile in the telecoms industry, but has promoted two ambitious technology projects in the past.

The first was an attempt to launch a national mobile network in India, itself a major undertaking. But Vavasi proposed to launch the network based on its own new wireless communications standard, separate to the GSM and CDMA systems that dominate the market. The company says its system, called Next Generation-1 (NG-1), is more energy-efficient and needs a narrower communications spectrum. But it requires specially-made network equipment and handsets.

No licence has yet been issued for the company to build an Indian network, but Vavasi does point to a network it successfully launched in Mongolia based on its NG-1 technology. Vavasi's second big project, announced earlier this year, is to build a high-tech silicon manufacturing facility in the Indian state of Rajasthan, at an estimated cost of $8bn. The factory would produce silicon products for use in everything from electronics to solar energy, and would be the biggest single investment made in Rajasthan.

The company is certainly not short on big ideas, and those who have dealt with its managing director, Farid Arifuddin, say he is an ambitious, technically-minded dealmaker, fluent in the details of his projects. But many doubt whether his company has the funding needed to turn multibillion-dollar ideas into reality. Aside from complex technology and a huge price tag, what Vavasi's two big projects apparently have in common is no clear source of funding; Mr Arifuddin declined to give details of who will provide the tens of billions of dollars needed for Vavasi's silicon project to move forward.

One investor that Vavasi says will join it in the Zain deal is Syed Mokhtar al Bukhary, a billionaire Malaysian investor whose family has roots in the Arabian peninsula. He is a reclusive man: attempts to make contact with Mr Syed Mokhtar over the past two weeks have had little success and he has made no public statements regarding the deal. Mr Syed Mokhtar began his career as a trader of sugar and rice and rose to prominence during the prime ministership of Mahathir Mohammed, Malaysia's longest-serving leader. His main corporate vehicle, the Malaysian Mining Company (MMC). made waves in the Gulf when, in 2006, it was selected to partner the Saudi Binladin Group to master-develop the kingdom's $30bn Jazan City project.

However, as with many of the world's billionaires, the economic crisis has not been kind to Mr Syed Mokhtar's fortune. Last year, Forbes magazine ranked him at number 605 in its list of the world's richest people, with an estimated worth of $2bn. This year's list, published in March, did not include Mr Syed Mokhtar, estimating that his net worth had dropped below the cutoff of $1bn. India's two largest state-owned telecoms, BSNL and MTNL, were listed in early reports as being part of the buying consortium, but have distanced themselves since the announcement. Both have said they are evaluating the opportunity, but neither have made commitments, and BSNL's chairman was quoted as saying the company would be more interested in acquiring individual Zain networks in Africa.

For the deal to go through at the price being quoted, Vavasi will need to find backers able to raise more than $13bn. It will also need a consortium member with considerable experience in the telecoms sector, analysts say. If the deal succeeds, Zain shareholders will not be the only winners. The Egyptian investment bank EFG-Hermes said in a recent report that the high valuation given to Zain by the deal, a premium of more than 40 per cent on current valuations, or almost 11 times forecast pre-tax earnings this year, would have a knock-on effect on the valuation of other Arab telecoms.

Saudi Telecom and Etisalat would both benefit, the report said. But the biggest winner would be Egypt's Orascom Telecom, the only big mobile operator in the Arab world that is not partly owned by its government. With just 25 per cent of Zain in the hands of a Kuwaiti sovereign fund, it and Orascom are among the only Middle-Eastern operators that could be easily acquired by a foreign buyer. Zain's premium valuation, EFG-Hermes said, meant a good offer for Orascom should not be too far away.