Zain deal throws doubt on Etisalat's Saudi operations

The kingdom may not accept the deal's effect on competition.

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The future of the Saudi Arabian operations of Etisalat and Zain are in doubt after the UAE telecommunications company made a preliminary bid for 46 per cent of the Kuwaiti group.

Etisalat's offer of US$10.5 billion (Dh38.56bn), or 1.70 Kuwaiti dinars a share, could lead to one of the Gulf's largest acquisitions and make the company one of the world's largest telecoms operators.

Etisalat and Zain operate mobile phone businesses in Saudi Arabia - Mobily and Zain Saudi Arabia respectively - and analysts say the kingdom's regulator could have a problem if the deal went through. "This is what's puzzling to me and I'm guessing that the regulator won't allow that," said a telecoms analyst based in Dubai who asked not to be identified. "Etisalat would control the second and third operator in the market and create a duopoly in the market. That was not the intent of the regulator when it issued its licences in 2007 when it wanted to create competition [in the mobile sector]."

Officials at the Communications and Information Technology Commission in Riyadh could not be reached. Ahmed bin Ali, the group vice president of corporate communications for Etisalat, declined to comment on its Saudi plans. But Mr bin Ali stressed conditions would have to be met for the deal to go through. "We would like to emphasise that no final agreement has been reached at this point in time as this offer depends on the fulfilment of specific requirements and conditions that must be met to finalise the deal," he said.

Kuwait's Kharafi Group, which owns more than 20 per cent of Zain, is reported to have accepted Etisalat's offer, an informed source told Reuters. Nasser al Kharafi, the chairman of the Kharafi Group, told the Kuwaiti newspaper Al Qabas yesterday the offer was "suitable and good for both parties". Antoine Aboukhalil, a spokesman for Zain, declined to comment, saying the matter was a shareholder issue.

Irfan Ellam, a telecoms analyst with Al Mal Capital, said Etisalat should have no problem funding the deal because the operator had about Dh11bn in cash reserves at the end of its most recent quarter and could raise an extra Dh58bn without harming its credit rating. "They can close up to Dh70bn, which covers the 46 per cent [stake] and they can service that easily," Mr Ellam said. Etisalat stock closed yesterday down 0.4 per cent on the Abu Dhabi Securities Exchange while Zain shares were halted in Kuwait, and are due to resume trading on Sunday.