Saudi Arabia: Zain scrapes through with $1.6 billion rights issue

$2.6 billion Islamic loan maturity; Paves way for takeover battle. Published in Euromoney, August 2012

One of the largest-ever Saudi rights issues was completed last month: a crucial step in resolving financial troubles at one of the country’s most indebted corporates. It might also pave the way for M&A activity among some of the region’s biggest telecoms firms.

Mobile Telecommunications Company of Saudi Arabia – partly owned by Kuwaiti telecoms group Zain – sold shares worth SR6 billion ($1.6 billion) at SR10 a share. According to the company there were applications for 632 million shares, amounting to 105% of the issue.

The rights issue is the second part of a three-stage process to return the mobile operator to financial health. The first step was a reduction in the company’s paid-up capital from SR14 billion to SR4.8 billion by cutting the number of shares from 1.4 billion to 480.1 million. This was followed by the rights issue, which raised SR3.45 billion in fresh cash, as well as converting SR2.55 billion of shareholder loans into equity.

The final stage was due to be completed as Euromoney went to press, with the refinancing of a SR9.75 billion murabaha facility, a type of Islamic loan, which was due to mature on July 27.

Zain Saudi Arabia was formed five years ago by a consortium of Kuwaiti telecoms firm Zain Group and eight Saudi companies. It received a 25-year licence from the local telecoms regulator, and launched services in August 2008. Since then it has built up a market share of about 16%.

But Zain Saudi Arabia has yet to make a profit and its debts have gradually risen. Alongside the murabaha facility and SR3.6 billion in shareholder financing, the company also has SR2.2 billion in subordinated financing and SR745 million in vendor financing from Motorola, which matures in December.

The company was forced to abandon its first attempt to get shareholder approval for the capital restructuring when insufficient investors to form a quorum came to a meeting on June 26. A second attempt on July 4 did attract enough shareholders and the plan was approved. Saudi Fransi and Al Rajhi Capital acted as the main underwriters and financial advisers on the transaction. The other underwriters were Albilad Investment Company, Alinma Investment Company and Saudi Hollandi Capital.

Of the SR3.45 billion in cash raised through the rights issue, SR1.4 billion has been earmarked to reduce current liabilities, SR1.15 billion to upgrade and expand the company’s telecoms network, and SR120 million to pay for the costs of running the issue. In addition, some SR750 million will be used to repay part of the murabaha facility, cutting the cost of servicing the debt by an estimated SR50 million a year.

Assuming the murabaha refinancing can now go through without difficulty because the company’s balance sheet looks healthier, Zain Saudi will now be able to focus on competing for market share with its two rivals, the state-owned Saudi Telecoms Company and Etihad-Etisalat (Mobily). The task of turning around the company’s profitability, meanwhile, is in the hands of a fairly new management team, led by chief executive Fraser Curley, who was put in place in March.

The newly improved balance sheet might yet make Zain Saudi Arabia a takeover target. In March 2011, two companies made a joint bid for Zain Group’s 25% share of the Saudi telco. Prince Alwaleed Bin Talal’s Kingdom Holding joined forces with Bahrain Telecommunications Company (Batelco).

Kingdom and Batelco abandoned the deal in September last year, with one of the reasons reportedly being Zain Saudi Arabia’s debts. "The consortium concluded that the terms and conditions as set out in its non-binding offer could not be met to its satisfaction," said a statement. But the difficulty offloading Zain’s Saudi business was, in turn, one factor that delayed the sale of a $12 billion stake in the Zain Group to UAE telecoms group Etisalat.

Etisalat’s bid for the Zain Group, which includes more attractive business in Iraq and elsewhere, was first announced just under two years ago. Offloading the Saudi business was a condition of the deal, and Etisalat’s bid was eventually abandoned in March 2011, partly because of disagreements among Zain’s shareholders in Kuwait, where the Kharafi family is one of the main shareholders advocating the Etisalat deal.

An earlier sale of Zain’s assets in sub-Saharan Africa was successful, with the Kuwaiti group selling its assets on the continent for $10.7 billion to India’s Bharti Airtel despite legal hurdles, particularly in Nigeria.

Still, scepticism persists about Zain Saudi Arabia’s ability to attract investors now. "Zain Saudi has been loss making since inception [in 2007]," says Farouk Miah, head of equity research at local investment bank NCB Capital. "A lot of existing shareholders are sitting on big paper losses."

In the meantime, other Saudi companies thinking of coming to the market with a rights issue will want to take note of the relatively weak reception that Zain Saudi Arabia received. Although its rights issue was oversubscribed, analysts point out that 105% is still very low for a Saudi share issue.

"It highlights the fact that retail investors are savvier than many people think," says Miah. "People realized that the fundamentals of the company are not great. That it will force companies to be a bit smarter and a bit more vigilant. They won’t be able to just turn to the markets whenever they want without having a good story or a good rationale for raising money."