The king is dead

Over the past seven years as MTC and then Zain managing director, Saad Al Barrak has presided over the most high-profile cellular operator in the Middle East. His resignation at the beginning of February, prompted by frustration with unilateral shareholder action leaves Zain bereft of its inexorable leader, and the Middle East losing one of its brightest corporate managers

Al Barrak and his managementeam have added tens of billions to Zain’s valuation over the years, and there are fears that some key executives may now also exit

It was never the modus operandi of the Zain Group to lie low and stay out of the public eye. Yet, to a large extent this is precisely what it has been doing for the past six months since Zain shareholders led by the Kharafi Group announced they had signed an agreement with a Malaysian-Indian consortium for the sale of a 46 per cent stake in the Kuwait mobile operator group. The shareholders made it clear that the negotiations for the sale were taking place at shareholder level, with little-to-no input from Zain’s executive management. This was a development that must have been particularly frustrating for Saad Al Barrak, given he had been the architect of the tens of billions of dollars of shareholder value during his time at the helm.

“There are so much unknown factors and lack of certainty,” commented a Zain insider when Comm. sought further details surrounding Al Barrak’s departure.

The insider’s comment seems to capture the mood at the operator perfectly; as is the case with the change of any leader, people become concerned with what an unknown future may hold, and what their position may be within it.

Zain’s board of directors issued a statement that Al Barrak’s resignation had been accepted and that he would officially leave his position as of the end of March – an inauspicious end to a glittering career with the Kuwait-listed mobile operator.

Al Barrak will forever be synonymous with raising the expectations of Gulf telecom operators beyond their domestic or regional markets, instead triggering a sense of self-confidence that the world setting was where operators from the region could legitimately aim for.

His 3x3x3 strategy, which revolved around growing from a regional player to becoming a leading international operation in as short a time as possible became the measuring stick for other regional operators including Etisalat and Qtel amongst others, when it came to articulating their ambitions.

Zain’s (then branded MTC) foray into Africa in 2005 for the princely sum of US$3.4 billion for Celtel International’s pan-continental assets was a brave move, which captured the telecom sector’s attention and marked the shift in power away from European telecom incumbents that had been pursuing emerging market strategies with various degrees of success, towards cash-rich Gulf-based operators.

What followed was a three-year frenzy of petrodollar-fuelled acquisitions by Gulf and other emerging market operators that literally froze out historical big hitters such as Vodafone, T-Mobile and France Telecom from investment opportunities in countries including Egypt (third licence), Saudi Arabia (second and third licences) and Iran (second licence).

The rebranding of MTC to Zain in 2007 was a manifestation of Al Barrak’s vision to bring all his energy, vibrancy and expectations for the operator under a single identity. His aim was to have Zain stand as a beacon of pride to what the Arab world had been able to achieve in the highly competitive global telecom world. Achieving the vision is now something that will likely take longer than Al Barrak had envisioned, though it is no longer his responsibility to drive it in the necessary direction. Brand Zain itself has been knocked by a number of setbacks, which in turn have impacted the company’s share price for much of 2009 and prevented Zain from seeking a prestigious secondary listing on the London Stock Exchange like it had intended to.

The company’s African assets, while accounting for an overwhelming number of its overall subscriber base have been adding disproportionately low contributions to service revenues and even lower amounts to net income. Speculation that Zain was considering selling off its African assets for reasons that were believed to be as much about allowing shareholders to cash-out on the value growth as much as it may have been about selling an underperforming asset for its highest valuation marked a significant shift in the market’s perception of Zain and its strategic options going forward.

Al Barrak’s successor will be faced with a number of challenges, not least the one of trying to fill the shoes of a senior manager as confident, self-assured and effective as his predecessor was. The successor will also be required to define the direction that the operator is set to follow immediately and into the medium-term.

Zain has borrowed significantly in order to fuel its expansion and with the tightened financial markets as a result of the global economic crisis, managing the operator’s debt obligations will be a priority. Just last month Zain Saudi Arabia announced it was in discussions with creditors over missing some financial commitments during 2009, connected with a two-year US$2.5 billion Islamic loan. Al Barrak had said the unmet commitment was not debt repayment, but related to performance ratios the mobile operator was expected to deliver to banks. Lenders have pardoned it under the condition they agree to a financial plan for 2010.

According to a statement, Zain Saudi Arabia said its capacity to ensure a timely delivery on commitments and continue in its business, hinges on the firm’s ability to ensure adequate funds on time and also on its success in discussing and changing some of the commitments for the four quarters to end-December, 2010.

The incoming CEO will also have to address the market speculation with respect the sale of any part of Zain Group or its African operations to any party. The speculation and uncertainty on the matter have wreaked havoc with Zain’s strategic outlook and the market’s understanding of it.

Choice Al Barrack rhetoric

“Be first, be daring and be different… This is the motto that has guided Zain from our beginnings as a small regional player to an international leader, and it will guide us from global player, to global leader. You are as large as your dream and as able as the capabilities you build. You have… two choices as a human being: to be a subject of history or a maker of history. Zain has chosen to belong to the second category”

“Despite the challenges imposed by the global economic crisis and the competitive markets in which we operate, these impressive first quarter results are testament to the sound management practices of the group and a reflection of our unwavering commitment to reach our 2011 target of being a top-ten global mobile operator”

“When we were small we had to make these kinds of agreements (co-branding agreements) with the giants (Vodafone) in order to make our businesses visible. Now that we are bigger and can stand on our own two feet we don’t need them. We now want to become like those giants and will achieve that by either bidding against them or by acquiring them”