Zain Africa sale may trigger telco consolidation

Zain's $10.7 billion (Dh39.26bn) sale of its African assets to India's Bharti Airtel could prompt consolidation of the telecommunications industry in the region, industry sources believe.

When it closes – subject to regulatory approvals – the acquisition will be the largest telecoms deal concluded in the Middle East. It could trigger further mergers and acquisition activity involving Zain, sources say. If shareholders continue to seek to exit the company, some of Zain's remaining Middle East assets could be sold off opportunistically, the sources speculate. It was shareholders who have pushed for the sale of the African assets to Bharti Airtel. A significant portion of the $9bn in cash generated by the sale will be distributed to them after a $4bn revolving credit facility is repaid.

The deal follows an earlier attempt to sell the entire company to an Indian-led consortium for $13.7bn. That too was promoted by shareholders seeking to divest their holdings. With that failed sale in mind, one industry source says there is no reason why shareholders would not contemplate selling further parts of the company once the African assets have gone and have the cash returned to them.

The Bharti acquisition will reduce previously acquisitive Zain to its existing Middle East operations, including Sudan and Morocco, which were excluded from the sale. These last two assets along with its operations in Iraq are particularly juicy, industry sources say.

Sudan is a large, profitable market where the company is well positioned, making it an attractive buy, said a second source. In contrast, Zain has posted losses in Saudi Arabia, having paid $6.1bn in 2007 for the licence, and could be willing to sell if approached by a buyer, the first source speculated.

Selling off bits of the remaining group on an opportunistic basis would insure a better valuation than selling the holding company. A piecemeal sale would increase the number of interested parties, which could pick and choose assets. Under this scenario any buyers are likely to be regional investors with an appetite for Middle East risk, the first source said.

For its part, Zain's management has said that in the future the company intends to focus on growing its Middle East business. Zain said that it will reveal its revised strategy shortly after the African asset sale closes, which the company expects to happen in mid-May. Should a trimmed-down Zain refocus on its home region, over the longer term, it could renew its acquisition strategy and be a regional consolidator, eying smaller regional players as targets, said a third source. (The author represents dealReporter, part of The Mergermarket Group)

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