A need for a clear direction at Zain

Zain, the Kuwaiti telecoms company, has been through a year of uncertainty, and analysts say it must redefine its strategy in order to stem heavy declines in its share price.

Kingdom Holding and Batelco scrapped plans to buy Zain's 25 per cent stake in Zain Saudi Arabia. Above, a Zain information kiosk in Riyadh. Waseem Obaidi for The National

Zain faces an urgent challenge after the most tumultuous year in the company's history.

The Kuwaiti telecommunications operator has been left in disarray after its failure to raise cash by selling off assets and a stake in the group.

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Analysts have warned that the company must now take decisive action if it is to stem further share-price declines.

So far, Zain has failed to sell a US$12 billion (Dh44.07bn) controlling stake in the business to Etisalat in the UAE, while plans to raise $950 million by offloading the Saudi Arabian operation have also fallen through.

All this has hit the company's share price, which has tumbled 38 per cent this year, closing last week at 0.93 dinars.

"A lot of investors are now beginning to vote with their feet," said Ibrahim Masood, a senior investment officer for asset management at the bank Mashreq. "So they need to do something, and they need to do something now.

"We're still waiting to get some clarity as to what exactly is it that Zain's strategy is over the next three years or so."

Zain started selling foreign operations last year, with most of its African subsidiaries going to India's Bharti Airtel for $9bn.

But since then, Mr Masood says, the company has lost its direction.

"Everybody has been waiting for the next big strategic move," he says.

Zain faces many problems. It lost several key members of its management team this year, including Barrak Al Sabeeh, the chief operating officer, and Haitham Al Khaled, the chief strategy and business development officer.

Disagreement among Zain stakeholders has also created uncertainty.

The Kharafi Group, a major shareholder with 26 per cent, has led calls for Zain to be sold, but the move has been opposed by other board members.

Kharafi is keen to raise cash. Reuters reported that it owes about $5bn to local banks.

"The Kharafi Group and their supporters were clearly motivated by the need for raising some liquidity," Mr Masood said. "Their motivation for pushing for a strategic sale to Etisalat wasn't exactly driven on the merits of the transaction itself."

Zain Group also faces a major challenge in Saudi Arabia. It owns a 25 per cent stake in Zain Saudi Arabia, which was recently forced to put forward a capital restructuring plan amid accumulated losses of $2.5bn.

Last month, Saad Al Barrak, the Saudi Arabian division chief executive, resigned after the collapse of talks to sell Zain's stake in the telecoms operation to Kingdom Holding and Batelco.

Andre Popov, a partner at the consultancy Peppers & Rogers Group in Dubai, says Zain "needs to fundamentally change both its strategy and tactical execution" in Saudi Arabia.

"Zain faces two great competitors: Mobily and very nimble incumbent STC [Saudi Telecom Company], who react very quickly to any of Zain's moves," Mr Popov says. "Zain started a price war on international tariffs that was met with swift responses by the other two competitors, and destroyed value for all three companies."

Despite those problems, analysts point to Zain's lucrative operations in markets such as Iraq, Sudan and Kuwait as signs of future growth.

"If you look at Zain today in the Middle East, they own very strong franchises in the countries in which they operate," says Simon Simonian, a telecoms analyst at Shuaa Capital. "And most of them are the number one operators in their respective markets."

But even in these high-potential markets there are challenges. Zain may be forced to pay additional, unexpected licence fees for the right to operate in South Sudan, after that country's formation in July.

"They'll probably end up having to pay anywhere between €80m (Dh404.8m) to €90m for the licence in the south," Mr Masood says.

But in the end, Zain shareholders may be tempted to sell a controlling stake in the company.

"Most of the telecom operators in the region are government-owned, and these are considered as national champions," Mr Simonian says. "So they are buyers, not sellers.

"Zain is in a unique situation. It is not government-owned, and has prime assets where they are the number one operator in key countries in the Middle East," he says.

Matthew Reed, a senior analyst for the Middle East and Africa at Informa Telecoms & Media, echoes those views. A renewed bid for Zain by Etisalat is "not impossible", he says.

But he also warns that Zain must first come up with a coherent strategy for the future.

"If the problems are not resolved, then it could begin to have operational and financial repercussions," Mr Reed says. "One wonders where Zain goes from here."

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