Omantel to acquire 10 per cent stake in Zain

Muscat-based telco's first major acquisition in the Middle East

Zain stocks surged on news of an acquisition deal by Omantel. Razan Alzayani / The National

Omantel has unveiled its largest overseas investment to date, with a US$846 million deal to acquire a nearly 10 per cent of the regional telco Zain.

The Muscat-based firm has announced a share purchase agreement to acquire 425.7 million shares in Zain, giving it a 9.84 per cent stake in the pan-regional operator.

The deal comes as Omantel looks to diversify its revenues ahead of increased competition in its home market, even as analysts question the high price agreed for a relatively minor stake.

“Acquiring a minority stake in Zain is a deliberate investment for Omantel as we position ourselves as a leading digital service provider,” said Omantel’s chief financial officer Martial Caratti.

“This is in line with our Corporate Strategy 3.0, launched in 2015. We have always emphasised that growth will come from continued diversification, and this acquisition positions Omantel for the future.”

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The acquisition of the Zain stake would be one of Omantel’s first international forays. The Omani operator 10 years ago acquired Pakistani ISP Worldcall, but offloaded the investment this year.

Buying in to Zain will provide Omantel with much needed diversification away from its home market, ahead of increased domestic competition in the form of an upcoming third mobile operator, said Omar Maher, an analyst with EFG Hermes.

But Mr Maher questioned the price agreed by Omantel for Zain’s shares, equivalent to a 33 per cent premium on their current market price.

“We see this premium as unjustified given that no recent deal multiples have led to such high valuations, and bearing in mind that this is a significant minority stake that offers no control privileges to Omantel,” Mr Maher said in a research note issued yesterday.

Omantel will be hoping to leverage its new relationship with Zain to broaden its digital services offering, according to Matthew Reed, a Dubai-based analyst with Ovum.

“Zain already has a fairly wide-ranging digital strategy through its stake in smart-city developer nexGen and other digital initiatives, so one can see that there could be strategic benefits for Omantel in the tie-up.”

Telcos across the region are looking to such digital services to boost their profitability as margins flatten on core business lines such as voice and data.

Omantel said it would look to cooperate with Zain across core business functions including the wholesale telecom business, operations and networks, commercial activities, and knowledge and experience sharing.

Credit Suisse is acting as financial adviser to the deal on Omantel’s side, with Freshfields Bruckhaus Deringer providing legal advice.

Headquartered in Kuwait, Zain has a commercial footprint in eight countries across the Middle East and Africa, including Saudi Arabia, Bahrain, Iraq and Jordan.

The operator earlier this week reported flat quarterly profits for the second quarter, which nonetheless came in ahead of analyst forecasts.

“For Zain Group, we see the deal as very positive given that it unlocks considerable idle value on their balance sheet, which will likely be deployed into a mix of higher dividends to shareholders and reinvestment in the business, we expect,” said Mr Maher.

Zain submitted a bid this year for Oman’s third mobile licence, in competition with the UAE’s Etisalat and Saudi Telecom. A shortlist for the third licence is due to be announced on August 14 by Oman’s Telecommunications Regulatory Authority, with a winner selected early next month.

Representatives from Omantel and Zain declined to comment on whether Omantel’s investment in Zain would disqualify the latter from participating further in the licensing process.

TRA officials did not respond to a request for comment.