ABU DHABI // Two of the Gulf's biggest telecommunications companies are venturing into the world's troubled capital markets to raise up to US$6.2 billion (Dh22.8bn), providing a litmus test of investor faith in the region's economic boom. Kuwait's Zain and Oman Telecommunications are both trying to tap investors for funds. Zain has asked shareholders to support a $4.5bn rights issue to fund expansion, while Oman is soliciting bids for 25 per cent of Oman Telecom, or Omantel, its biggest phone company, an investment worth an estimated $1.7bn.
The efforts from the two companies come at time when global investors are pulling back from emerging markets as an unfolding credit crisis and a looming global economic downturn dry up the amount of available money. According to data from Thomson Reuters, the value of global mergers and acquisitions dropped 18.2 per cent in the first half of this year compared with the same period last year. Syndicated loans in the same period fell by 46.6 per cent. Bond issues fell by 36 per cent, and sales of new stock dropped by 48.3 per cent.
"IPOs are very difficult to get off the ground," said Edward Teather, an economist at UBS in Singapore. Thomson recorded 96 issues, seeking $31.7bn in funding, were pulled in the first six months of this year due to weak investor sentiment. Despite a continued rush of oil revenues in the Gulf amid high prices for crude, bankers in the region say the global liquidity crunch has finally arrived here, forcing local borrowers to pay more as they compete with global borrowers for funds.
"Every time we feel we're out of it and liquidity is coming back, we're still here," said Mahmood al Aradi, the head of the financial markets division at the National Bank of Abu Dhabi. Since early June, the National Bank of Dubai's benchmark Emirates Interbank three-month offer rate has risen from 1.88 per cent to 3.08 per cent, representing a 63 per cent increase. Saudi Arabia's equivalent rate has climbed 43 per cent.
How well investors respond to Zain's rights issue and Omantel's sale, therefore, will to some extent depend on whether investors are willing and able to overcome the tight funding environment to bet on growth in telecommunications in the Gulf and Africa, where Zain is a major operator. Regional telecom markets are booming thanks to market liberalisation and an oil-driven economic boom that is fostering the rapid growth of a middle class eager to own the latest mobile phones. In Saudi Arabia, the number of mobile phone users has reportedly jumped to 20 million from 2.5 million five years ago. Mobile phone penetration in Qatar, meanwhile, has reportedly risen 150 per cent.
Even after the recent slide by oil prices, oil remains well above the records it was setting at the start of the year and economists say the region's outlook remains bright. Fitch Ratings estimates that, even after factoring in double-digit inflation, Abu Dhabi's economy will grow 3.2 per cent this year. In July, Dubai's Government-owned cellular operator, du, lined up Dh3bn (US$11 bn) in a syndicated loan despite a 22 per cent decline in syndicated loans around the region. It paid only 0.125 of a percentage point over the London interbank offer rate, or Libor; by contrast, when Qatar Telecom, or Q-Tel, raised $3bn in syndicated debt late last year, it had to offer 0.625 of a percentage point over Libor. The gap between the Libor and a loan rate typically signifies how risky investors consider the loan to be.
Zain, the Kuwaiti phone company with operations in 22 countries across the Middle East and Africa, plans to sell up to $4.5bn in new shares to existing shareholders by Sept 18 to help fund its rapid expansion. The company this month launched a new cellular network in Saudi Arabia to compete with Etisalat's Mobily and Saudi Telecom. While Zain's new network is initially buying space on Mobily's network, the company has said it will spend $1.5bn to roll out nationwide coverage of its own. Saudi Arabia is the Gulf's largest and fastest-growing cellular market, but has already exceeded full penetration, with roughly 115 mobile phones for every 100 people. Still, the average revenue per subscriber in Saudi Arabia is still reckoned to be among the highest in the region.
Zain will also eventually add the new Saudi network to its "One Network" constellation of 16 networks. Subscribers to any of these networks can use their phones while travelling within any of the other networks without incurring the roaming charges operators usually levy. Oman, meanwhile, has set a September deadline for the first round of bids for its 25 per cent stake on Omantel, a stake that analysts say could fetch at least $1.7bn. Oman has already received expressions of interest from eight investors, a list that reportedly includes Saudi Telecom, Etisalat and Zain. Analysts have also suggested that South Africa's MTN and the UK's Vodafone may be planning to bid.
Omantel is fending off competition from a new entrant, Narwas, a joint venture between Q-Tel and Denmark's TDC. Narwas has already grabbed a 40 per cent share of a cellular market that has doubled since it launched in 2005. Another Dubai-based company plans to start a third operator in Oman called Friendi. Like many former monopolies, therefore, Omantel is caught between its low-growth, fixed-line network and the increasingly competitive race for the fast-growing mobile market.
To find new sources of growth, Omantel hopes to join such operators as Zain and the UAE's Emirates Telecommunications, or Etisalat, by investing in new markets overseas. Earlier this year, it paid $193 million for Worldcall, the Pakistani telecommunications company. Now the Omani government plans to sell part of its 70 per cent stake - reducing it to a 45 per cent stake - to a strategic investor to give the company a shareholder that can shepherd its growth. The bidding requirements limit applications to experienced operators with at least five million customers in more than one country.
After narrowing September's bidders to a short list, Oman plans to accept second-round bids that will be due sometime in the fourth quarter. @Email:warnaold@thenational.ae tgara@thenational.ae