Zain Buys Further Stake In Saudi Unit

Zain has raised its stake in loss-making unit Zain Saudi, the Kuwaiti telecoms operator said on Tuesday, oversubscribing to the affiliate’s $1.6 billion rights issue following a tepid response from other shareholders.

That raised Zain’s stake in Saudi Arabia’s number three operator to 37 per cent from 25 per cent, marking a reversal in strategy for the Kuwait firm whose attempt to sell its entire holding failed last year.

But the rights issue does not give Zain Saudi – yet to make a quarterly profit since launching services in 2008 – enough financial firepower to challenge richer rivals for market share or significantly cut onerous finance costs, analysts said.

“The parent will probably be more focused on Zain Saudi,” said Nishit Lakhotia, telecoms analyst at Securities & Investment Co in Bahrain. “That would be positive for Zain Saudi, but for Zain group it could be a different story due to the continuing losses.”

Both companies were not immediately available for comment.

Zain Saudi, whose debts stood at 22.9 billion riyals ($6.11 billion) on March 31, will not be able to boost operating capabilities significantly in the wake of the share sale.

Almost half – 2.55 billion riyals – came from converting loans from founding shareholders into equity, while 750 million riyals will repay part of a 9.75 billion riyal Islamic facility and 1.43 billion riyals will go on reducing current liabilities.

That leaves 1.15 billion riyals for capital expenditure, which will be deployed building 1,300 new network sites and upgrading infrastructure, according to the issue prospectus.

“The company still needs to undertake substantial capital expenditure and it will probably have to increase its debt to fund this,” said Amine Bentaleb, director of asset management at Arqaam Capital. “Without network improvements it can’t hope to win the necessary market share that would allow it to break even on an operational basis.”

Zain Saudi has struggled to compete against Saudi Telecom Co, the Gulf’s biggest operator, and Etihad Etisalat. Its share of the kingdom’s mobile market fell to 12 per cent last year from 18 per cent in 2009.

Thecompany paid $6.1 billion for a 25-year telecom licence and racked up 10.1 billion riyals in accumulated losses by March 31, forcing it to cut its capital prior to the rights issue. It reported a narrower second-quarter loss in July.

“Zain Saudi needs first to stop the bleeding, but the recovery slope is steep,” said Marc Hammoud, Deutsche Bank telecoms analyst, citing a tough Saudi telecom sector outlook.

Subscriber growth is stagnating in the kingdom, with mobile penetration about 188 per cent. Call margins are in decline due to competition from domestic rivals and Internet phone services.

Zain Saudi’s rivals posted higher second-quarter profits as they wooed high-income users with bundled packages that include fixed or mobile broadband. But Zain Saudi’s network limitations mean it has largely targeted lower income mobile subscribers through special offers.

The rights issue reduced its loans from founding shareholders, but it still faces hefty financing charges. In 2011, it paid 16.6 per cent of revenues in such charges.

Zain Saudi has also delayed refinancing a $2.6 billion Murabaha Islamic facility maturing on July 27 by two months.

“Zain Saudi hasn’t demonstrated a clear plan to repay some of its debts and become a sustainable business,” said Matthew Reed, a senior analyst at Informa Telecoms and Media.

Zain’s shares ended flat, while Zain Saudi was up 3.4 per cent, easing up from Monday’s record low.