Etisalat has ended talks to buy a controlling stake in Kuwait's Zain for almost US$12 billion (Dh44.07bn), scrapping a blockbuster deal that would have reshaped the Gulf's telecommunications landscape.
The offer of 1.7 Kuwaiti dinars per Zain share was "no longer viable" because of political unrest in the region, dissent among some of Zain's biggest shareholders and regulatory changes in Kuwait, Etisalat said yesterday.
The news was somewhat surprising to analysts, many of whom thought the deal was finally on track after an extensive examination of Zain's business by Etisalat's lawyers, accountants and advisers.
A recent bid by Bahrain's Batelco and Saudi Arabia's Kingdom Holding to take over Zain's Saudi unit also appeared to be progressing. Etisalat needed Zain to sell its Saudi subsidiary to avoid scrutiny from regulators in the kingdom, where the UAE telecoms giant already has its own operations.
"They were becoming aggressive about [completing the deal] and we all thought particularly after the Zain Saudi deal with Batelco and Kingdom Holding that it would pave the way for it to go through," said Shrouk Diab, a telecoms analyst at Rasmala in Dubai. The deal to acquire Zain Saudi was still on track despite the cancellation of the Etisalat acquisition, Batelco's chief executive said yesterday.
Etisalat, the region's biggest telecoms company by market value, first announced in September it was bidding for a 46 per cent stake in Zain, the region's third-largest telecoms company, with operations in Kuwait, Iraq, Bahrain, Jordan, Lebanon and Saudi Arabia.
While that stake did not represent more than half of Zain's shares, it would have given Etisalat 51 per cent of voting rights and effective control of its board of directors, allowing it to hold sway in major strategic decisions. But after a saga filled with lawsuits, shareholder disputes and new laws covering takeovers of Kuwaiti companies, Etisalat decided to drop the bid.
New "mandatory offer" rules in Kuwait are expected to require investors proposing to take over more than 30 per cent of a publicly traded company to make the same offer to all remaining shareholders.
"In light of the results of the extensive due diligence performed by Etisalat and its financial, legal and technical advisers, the current political unrest in the region, non-unanimous agreement among Zain's board of directors … and the impact of the upcoming mandatory offer rules in Kuwait, the terms of its conditional binding offer as announced on November 3 2010 are no longer viable," Etisalat said.
The scrapping of the offer deals a blow to Etisalat's expansion plans, analysts say. With the Zain acquisition off the table, the company may have to look outside the crowded Gulf for new markets and new opportunities.
There are many reasons the deal did not work, analysts say, from pricing to legal changes to Etisalat's complaints about Zain's unwillingness to hand over important information about the business.
"Maybe the price right now is not appropriate for them and that's why they pulled out, or it might be questions in terms of transparency," Ms Diab said.
Back in September, Etisalat's "conditional offer" to acquire the stake from Kuwait's prominent al Kharafi family and other shareholders received a warm welcome.
Nasser al Kharafi, the head of the Kharafi Group, called it "suitable and good for both parties". The al Kharafis own 12.67 per cent of Zain through their company Al Khair National for Stock and Real Estate, and are thought to own a total of about 20 per cent through various subsidiaries.
As the al Kharafis tried to help Etisalat secure the 46 per cent holding it wanted, however, dissent started to well up. Ali al Mussa, the chairman of Kuwait's Securities House, said in October that he and a group of investors holding about 20 per cent of Zain stock were ready to pay the 1.7 dinar per share price Etisalat was offering in an apparent bid to thwart a takeover. That dispute was eventually resolved, but another major shareholder sued Zain and its board for revealing the company's financial position to Etisalat.
Mohammed Omran, the chairman of Etisalat, said in October the reaction was mostly "very positive" but acknowledged that "as in any high-profile transaction there is some opposition from some shareholders".
By November, Zain agreed to let Etisalat begin due diligence on the company. Etisalat also made its 1.7 dinar offer binding, contingent on the sale of Zain's Saudi unit.
Scepticism mounted, however, after Etisalat missed a due diligence deadline in January because of "unforeseeable delays in Zain providing access to all relevant information", according to a company statement. Further due diligence deadlines were missed, and the Kharafi Group pulled out of discussions this month.