The launch of the Kuwaiti telecoms operator’s Saudi operation is the latest step in its expansion strategy.
Kuwait’s MTC was one of the first mobile telecoms companies in the Gulf, bringing GSM technology to Kuwait in 1994 and launching pre-paid local services five years later.
Since the late 1990s, when the Kuwaiti government opted to liberalise the telecoms market by allowing Wataniya to enter the sector, MTC has faced competition. In 2001, in a bid to further drive competition, the state reduced its stake in MTC to 25 per cent, from 49 per cent.
|Date established||1983, as Mobile Telecommunication Company (MTC); rebranded Zain in September 2007|
|Main business sectors||Mobile telecoms|
|Main business regions||Middle East and Africa|
|Business value||Consolidated gross turnover for January-June 2008 $1.67bn; net profits $270.5m|
The competition drove MTC to perform well in pricing and service terms, and the loss of its domestic monopoly also laid the ground for its international expansion, as it sought to expand its customer base. In September 2008, MTC was rebranded Zain.
Through its cross-border expansion strategy, Zain has enjoyed spectacular growth. This started with the $424m acquisition of Fastlink, Jordan’s leading mobile operator, in January 2003, and the capture of Bahrain’s second mobile telecoms licence four months later. The Bahraini operation became one of the first in the Gulf to adopt third-generation
Zain (then MTC) was contracted to manage a telecoms service, MTC Touch, in Lebanon in June 2004. In 2005, it acquired Celtel, one of the largest multinational operators of mobile services in sub-Saharan Africa, for $2.84bn. The acquisition has been key to its expansion strategy. It was awarded one of the first three mobile licences in Iraq in August 2007, where it went on to launch services under the brand name Atheer.
Although average income levels in Africa are far lower than in the Middle East, the continent has experienced huge growth in mobile telecoms activity, in part because fixed-line networks are poorly developed and connection rates are low.
Given the number of people African countries offer as potential customers, telecoms operations on the continent are highly attractive to firms based in a small markets such as Kuwait.
The addition of Madacom (Madagascar) to the MTC group in late 2005, for example, brought more than 200,000 additional customers, while the $1bn purchase of Vmobile in Nigeria in early 2006 added 5 million customers to its books.
The group also reinforced its position in Iraq, paying $1.25bn to secure a 15-year nationwide licence in August 2007 before acquiring Orascom’s local subsidiary, Iraqna, in December 2007, a take-over that strengthened its position as market leader in the country, where it now has more than 7 million subscribers.
Following this wave of sub-Saharan expansion, MTC concentrated on strengthening its financial base, before taking on its next major challenge: the launch in August 2008 of services in Saudi Arabia, the Arab world’s biggest economy, where it has now become the third largest mobile telecoms operator (see panel).
Zain aims to become the world’s sixth-largest mobile telecoms operator by 2011. The development of Zain has been marked by a series of major financings, to fund its ambitious growth and technological innovation. Despite the rapid increase in revenue, the group has felt the need to mobilise extra capital from outside sources.
In July 2006, for example, just weeks after announcing a 121 per cent rise in half-year net income to KD254m ($872m), the then MTC signed a $4bn syndicated credit facility. In December 2006, despite a 109 per cent jump in net income in the second half of the year, it took on a $1.2bn murabaha Islamic financing provided by a group of 29 international institutions.
The purpose of the fundraising initiatives became apparent when the group outbid its rivals with a SR22.9bn ($6.1bn) offer to secure the third Saudi mobile telecoms licence in spring 2007.
Even after this, it was still in a position to spend $2.45bn on the long-term Iraq licence and the Iraqna acquisition in 2007. Alongside these outlays, the $120m purchase of Westel in Ghana in October 2007 was small.
Having taken on such large development and financing commitments, this year Zain has consolidated its financial base, by raising $4.49bn in new capital from its shareholders.
In September 2007, MTC embarked on the rebranding of its services as Zain, across Arab markets initially before moving on to Africa - where the Celtel name was still in use - in August 2008. This should reinforce the group’s corporate image.
Zain has moved its legal domicile to Bahrain because of the tax and regulatory hurdles to attracting international shareholder investors to Kuwait.
But the group continues to insist that it remains, in essence, a Kuwaiti company, although its origins will inevitably become less noticeable as the group further develops its international presence.
By August 2008, Zain claimed 50 million customers, and that total is likely to grow rapidly as services expand in Saudi Arabia.
It has just launched One Network, a service option that allows customers across 16 out of its 22 network countries a borderless roaming service, under which they can be treated as local users, paying local prices, whichever market they are in.
For Zain, there is no doubt that Africa offers huge long-term potential. But in the near term, it is the development of the Saudi business that represents the greatest challenge.
Telecoms industry observers have been impressed by the group’s growth, but their analyses also highlight the demanding competitive conditions with which it must contend in many countries.
Zain subscribers worldwide - 43.2 million
Number of Kuwaiti subscribers - 1.6 million
The sum Zain paid for Celtel in 2005 - $2.84bn
Zain: Performance in new markets
Development in Saudi Arabia represents a major strategic cost commitment for Zain. Egyptian investment bank EFG-Hermes warned in a telecoms report in June that it could take until 2015 for the group to achieve a 15 per cent share of this key market, although revenues are projected to rise steadily, from about SR260m ($69m) this year to about SR5.7bn in 2014.
EFG-Hermes is more cautious than Zain in forecasting the expansion of the Saudi customer base, which it expects to number about 1.3 million by the end of 2008.
Zain Saudi Arabia is listed on the Saudi stock market (Tadawul) and will pay management fees equal to 4 per cent of its revenue to the main group for the first two years of operation, falling to 2 per cent in 2012. A further 0.7 per cent of revenue will be paid in royalties to the parent group.
The company has taken on hefty capital expenditure costs in its drive to forge a network that can reach at least 95 per cent of the population. While 53 per cent — in 36 urban areas - are covered through major telecom highways, the rest will be serviced through a countrywide roaming service. The group aims to offer third-generation (3G) broadband to areas holding half the national population.
EFG-Hermes estimates that capital investment this year will reach SR2.7bn, before falling to SR1.3bn in 2009, when outlays will be equivalent to about 67 per cent of sales income. Capital spending will taper off to little more than 20 per cent of sales income by 2011. “We do not expect Zain Saudi Arabia to generate positive free cash flow before 2012,” the EFG-Hermes report said.
Local rival Mobily achieved this in only its second year of operation. But in today’s more competitive conditions, Zain will have to operate on lower margins, and therefore require more time to break even.
There are marked variations in Zain’s performance from country to country. For example, in the first quarter of 2008, the group continued to expand its market share in Bahrain, boosting its subscriber base by 114 per cent to 528,800.
However, conditions were much tougher in the highly liberalised Jordanian market, with rivals Orange and Xpress fighting for business.
Xpress had more than trebled its market share to 20 per cent by the end of March this year since its 2004 launch, while Zain’s subscriber base declined by 5 per cent compared with March 2007, to 1.81 million.
In Africa, by buying telecoms operator Celtel outright, Zain was able to acquire staff and systems adapted to the demanding local conditions, with a detailed understanding of sub-Saharan markets that it did not have in-house.
Even so, it has not always emerged ahead of operators with deeper indigenous roots.In Kenya, Zain has struggled to cope with the challenge presented by the local Safaricom, which has a 72.7 per cent of the market.
In the first quarter of 2008, Celtel/Zain’s market share was 23.1 per cent down on its share in the same quarter of 2007.
Yet in neighbouring Uganda, the group has been successfully expanding, pushing its 2007 share to 32 per cent, mainly at the expense of market leader MTN.
In Nigeria, which has a population of 140 million, there is room for everyone to do well: both Celtel/Zain and MTN have been expanding, though the former is growing fastest.
Despite its global ambitions, Zain is still dependent on Kuwait as the engine room of its business. Last year, the country produced a staggering 45 per cent of the group’s adjusted net profits, according to Dubai-based investment bank Shuaa Capital.