Zain defies odds to raise $4.5bn

In the same week that the world economy was in turmoil, investors pumped billions of dollars into the Kuwaiti mobile operator Zain.

Zain closed its rights issue a few days after the collapse of Lehman Brothers and the sale of Merrill Lynch.

In the same week that the world economy was on the brink of unprecedented turmoil, investors pumped billions of dollars of cash into the Kuwaiti mobile operator Zain. The largest company on the Kuwaiti stock exchange closed its US$4.5 billion (Dh16.5bn) rights offering last Wednesday, just days after the demise of Lehman Brothers and the sale of Merril Lynch, and on the same day as the near collapse of the insurance group AIG.

"Obviously with these market conditions, the timing was difficult," said Simon Simonian, an analyst at Shuaa Capital. "They must be very happy with the result, given the circumstances." Investors prefer to hold their cash in interest-bearing accounts for as long as possible, paying for new shares on the last days of an issuing. This meant the bulk of the new Zain shares on offer were due to be paid on some of the worst days for international financing in memory.

"There must have been some nervous faces in their offices last week," said an analyst at a regional investment bank. "Nobody knew if how much of people's money was tied up in bad debt, or getting called in to cover margin calls in foreign markets. There was a lot of uncertainty and they must be relieved to have pulled it off." A Zain spokesman said a large portion of the $4.5bn raised came to the company last Wednesday, the day the offering closed. The company has since said that 99 per cent of its shareholders took part in the offering, buying new shares in the company at a 50 per cent discount to the market price.

"There are three reasons why the offering was so successful," said Essa Buheji, an analyst at Taib Securities in Bahrain. "The issue price was good, at an almost 50 per cent discount. The company valuation is good, and is still trading at a discount to its fair price. And its future potential is very good, with lots of promising international operations." As opposed to raising money through loans, debt issues or new offerings to the market, a rights offering deals only with existing shareholders, offering them the chance to increase their investment in the company. By not taking part in the offering, shareholders have their ownership of the company diluted, holding a smaller stake in its future earnings.

As such, a rights offering is seen as a referendum on the management and future prospects of a company, with happy shareholders participating and unhappy ones choosing to sell their shares, rather than see their earnings potential reduced. The success of Zain's offering was a "unanimous vote of confidence by our shareholders in Zain's management team, the performance to date and in our profitable expansion strategy", said Saad al Barrak, the company's chief executive.

Zain's aggressive international expansion has made the company one of the world's fastest-growing mobile operators, with number one or two positions in every market in which it operates. It is rapidly adding new customers in growth markets like Saudi Arabia and Nigeria, while fighting increased competition at home in Kuwait. The company's share price has remained relatively stable during a summer of chaos on Gulf markets. Since the beginning of July, it has fluctuated by a maximum of eight per cent, far lower than the sharp drops experienced by other regional telecommunications players like Etisalat and Saudi Telecom.

The Kuwaiti stock exchange, of which Zain is the largest member, has dropped more than 15 per cent in the same period. Zain's capital raising was the largest by a Kuwaiti company and would be used to finance further international expansion and repay debt, Dr Barrak said. [e-mail]