Nine Months Later

  
Al Barrak suggests the rebranding of Celtel will commence in the third quarter.

Nine months after the launch of its new global corporate brand, Zain Group continues to build its case to become a top 10 global telecoms operator by 2011. Market conditions are becoming all the more challenging and the emerging market halo is fast evolving into

a highly competitive, highly charged place to do business. Saad Al Barrak tells Comm. just how far the company has come in the past months and of the work that still needs to be done.

Management at Zain Group is largely unfazed by the mounting speculation in the market that MTN Group of South Africa may be taken over by Indian operator Bharti Airtel or the UK’s Vodafone. Some areas of media speculation went as far as suggesting Zain Group, which rebranded from the corporate identity of MTC Group last September, may also be caught up in the emerging telecoms market feeding frenzy that appears to be gathering pace at this point in time.

“Zain is currently in the process of concluding the capital increase that was approved by the shareholders in March 2008 at the annual general meeting,” Zain Group CEO, Saad Al Barrak confirms. “No other corporate action will take place until that is successfully concluded.”

Al Barrak notes there are many financing options open to Zain and the company will continue to assess opportunities as they occur. As for a Vodafone takeover approach for Zain, that’s a non-story, according to the Kuwait-based operator. “We are still out to reach our stated ambitions by 2011, which is to become a top 10 player by reaching our ACE targets. Should we receive any offer, then it is subject to the board approving such,” Al Barrak asserts.

Referring to Zain as being Kuwait-based is a detail in the process of changing as the operator decamps and heads to Bahrain to establish its global headquarters. It appears an odd choice of location, and was chosen ahead of Dubai and Amsterdam, because of its geographic centrality, proximity to Zain’s ongoing operations and relatively progressive financial and regulatory framework. Also taken into consideration was Bahrain’s relatively liberal socio-political situation, which would be easier to adapt to for expatriates from other parts of the world.

“People are already in Bahrain,” Al Barrak responds when asked when he expects the headquarters to become operational. “It is a staggered process as facilities become available, and by September 2008 all group personnel are expected to be based in Bahrain.”

The Gulf island nation is a market in which Zain already has experience, having operated there since becoming the second mobile operator in December 2003, and is actually in the process of making a share offer for the Bahraini operation as mandated by its operating licence there. The operator is looking to list on the Bahrain stockmarket in a matter of months.

All personnel from Celtel International’s Amsterdam offices are expected to move to the Bahrain facility, excluding the IT departments.

Apart from the move to Manama, Celtel International operations across 14 sub-Saharan African countries are set to undergo the rigorous programme of rebranding as the operational units fall in line with the parent company. According to Al Barrak, the plan is to rebrand all African operations to Zain in Q308, believing this will assist in Zain’s ambitions to establish a prime global position.

In some African markets, the rebranding process is actually a chance for the operator to reconnect with its subscriber base and reinforce its value proposition.

In Kenya, for example, Celtel lies a distant second in terms of mobile subscriber numbers as compared to market leader Safaricom. It is one of the few operations in the Zain portfolio that last year posted a full-year loss, amounting to US$21.7 million, and Zain attributed this to the so-called clubbing effect of on-net calls on Safaricom’s network.

The arrival of two further mobile operators later this year – Econet Wireless Kenya and Telkom Kenya, is likely to further raise the competitive pressure in the east African country, and together with a network expansion programme, Celtel Kenya is also looking to improve its position in the market based on the campaigns about rebranding the network to Zain.

An area in which Celtel has been building a strong brand position on the African continent is with respect to its One Network roaming arrangement, which now extends across a dozen countries in Africa. One Network is the world’s first borderless mobile telecoms network service, first launched by Celtel in September 2006 in Kenya, Tanzania and Uganda.

By November 2007, a further nine African countries became connected: Democratic Republic of the Congo, Republic of the Congo, Gabon, Burkina Faso, Chad, Malawi, Niger, Nigeria and Sudan, offering more than 400 million people in twelve countries across east, west and central Africa the opportunity to communicate freely across geographical borders without roaming call surcharges and without having to pay to receive incoming calls. Thus the 28 million Zain Group/Celtel subscribers were permitted to benefit from being treated as ‘domestic customers’ in any of these countries.

In April this year, the service was extended and introduced to Zain’s operations in Bahrain, Iraq, Jordan and Sudan where more than 14 million Zain customers also now have access to the same One Network benefits.

The service is available to over 75 million inhabitants of these four countries, which is estimated to reach over 100 million once Zain commences operation in Saudi Arabia.

The kingdom will immediately become part of the Middle East One Network, as will Zain’s other operations in the region, subject to governmental and regulatory approvals.

“The impact of rebranding has been enormous on the operations that we have done so with,” states Al Barrak. “There has been significant positive feedback from employees and customers alike, with the successful campaigns undertaken on regional and local television and other media.”

However, the progress achieved by Zain in recent months has not been without its challenges. The operator’s net income for Q108 came in lower than expected at US$270.5m, and questions were raised whether the operator’s earnings growth was potentially starting to plateau.

“Due to large capital expenditure such as the Saudi licence, expansion in Africa and in Iraq, the profits were affected for 2007 and early 2008,” Al Barrak explains. “We expect the results of these investments to bear fruit in our 2009 financial results.”

The significance of Zain’s launch of services in Saudi Arabia cannot be overstated. Having pledged US$6.11 billion for the most expensive greenfield mobile licence in the Middle East ever, Zain is faced with having to make good on an investment case some analysts forecast would be hard to develop successfully.

The kingdom’s geographical location, bridging Asia and Africa is an obvious value-adding proposition for Zain, and given the group’s existing presence in a number of surrounding markets and the incorporation of Zain Saudi Arabia into One Network programme from launch, potential geographic synergies definitely have space to manifest.

Zain in Saudi Arabia has already been boosted by a successful initial public offering in February, which was 183 per cent oversubscribed.

Zain sought to raise SR6.3bn (US$1.68bn) by selling shares to the public in the offering, and some 8.53m Saudi nationals offered SR17.83bn towards the IPO, which sold shares at SR10 each in the 10-day offering that ended on February 18.

Zain raised a further SR700 million by selling shares to the state-run Public Pension Agency. Zain owns 25 per cent of the operation in Saudi Arabia, five per cent is held by the Public Pension Agency, 45 per cent is listed publicly, while the remaining 25 per cent is held by a number of Saudi corporate investors.

In terms of the strategic direction in which Zain is headed, and into which presence in Saudi Arabia forms a part, at the beginning of last year Zain Group (then called MTC Group) embarked on its ‘ACE’ programme, which represents the adoption of a set of values positioned to propel the operator onto the global stage.

ACE, which stands for accelerate, consolidate and expand, is an implementation strategy that seeks to extract superior value from existing assets through acceleration of growth, consolidation of operations and further expansion of the business. Based on organic growth through ACE, Zain Group aims to serve 110m subscribers across all the markets it operates by 2011, attain a US$6bn EBITDA, and emerge as one of the top 10 mobile operators in the world.

In Saudi Arabia, Zain stands to benefit from the high ARPU levels of around US$35, as well as the 25-year duration of its operating licence, which is substantially longer than standard 15-year concessions. However, the delay in entering the market is likely to only make its task that much more difficult when the time comes.

Zain had originally looked to launch commercial services in the first quarter of 2008, but this timescale has since slid to Q308. Given the rate at which market leader Al Jawal and second-placed Mobily are adding subscribers on a month-on-month basis, a six-month launch delay could really wreak havoc with Zain’s business plan on the ground. At the end of March, Mobily estimated it had a 39 per cent market share, reflecting a subscriber base of close to over 11.1 million. STC estimates its Al Jawal network counts more than 17 million subscribers, with the two operators’ total number of subscribers taking the country to almost 100 per cent mobile penetration.

Add to this competitive landscape the three fixed-line operators that are set to commence operations later this year and it is clear that the task ahead ahead for Zain will not be an easy one. Zain has been methodical in its approach of investment opportunities within the Middle East and Africa region, but does have aspirations, should the opportunities present themselves, to examine entering new geographies.

“India, for example, with a population in excess of 1.1 billion and a cellular services penetration less than 30 per cent represents a strong growth market,” comments Al Barrak. “Zain is interested in India as well as in other Asian countries such as Pakistan and Iran in the region and we are exploring various opportunities that will become value accretive in the long-term,” he reveals.

“Our interest ranges from strategic investments in existing operations, to the establishment of strategic alliances to facilitate products and services exchange, to greenfield opportunities.”

Zain had also been expected to this year start making moves to seek a listing on an international stock exchange, most likely the London Stock Exchange. Given the operator’s US$4.4 billion rights issue, its current financing plans appear resolved, though there still remains future scope for completing the international listing. “Zain will seek to have an international listing that would help us become the top-ten telecoms provider that we have said we are aiming to become,” Al Barrak says.

ZAIN MILESTONES 1994-2007

1994: Introduced GSM in Kuwait. One of the first to do so in the region.

1999: Among the first to introduce prepaid services in the region.

2000: Kuwait mobile market opens up to competition.

2001: Government of Kuwait reduces stake from 49 per cent to 25 per cent.

September 2002: Branding agreement with Vodafone in Kuwait operation branded as MTC-Vodafone.

January 2003: Acquires 91.5 per cent of Fastlink- Jordan’s leading mobile operator for US$424 million taking total holding to 96.5 per cent.

April 2003: Awarded second GSM licence in Bahrain operation branded as MTC-Vodafone.

December 2003: Awarded one of three GSM licences in Iraq operation branded as MTC Atheer.

December 2003: Bahrain operation first to launch 3G nationwide in the region.

April 2004: Awarded management agreement for one of Lebanon’s mobile operations – operation branded as MTC Touch.

March 2005: Enters into agreement to acquire Celtel Africa for US$3.36 billion.

May 2005: Acquisition of 85 per cent of Celtel shares for US$2.84bn completed.

November 16, 2005: MTC completes 100 per cent capital increase through rights issue raising US$2.3bn to fund future expansion.

December 13, 2005: MTC subsidiary Celtel acquires Madacom, an operator based in Madagascar with more than 200,000 customers.

February 6, 2006: MTC subsidiary Celtel acquires the remaining 61 per cent of Mobitel in Sudan from Sudatel, in a deal valued $1.332bn, thus taking ownership to 100 per cent.

May 21, 2006: MTC launches 3.5G (HSDPA) commercially in Bahrain.

May 31, 2006: MTC subsidiary Celtel acquires a controlling stake of 65 per cent in Vmobile, one of Nigeria’s leading mobile telecoms operators with over five million customers for US$1.005bn.

July 27, 2006: MTC signs the general syndication agreement for a US$4bn credit facility that will be used to fund MTC’s future acquisitions and general corporate needs.

Sept 27, 2006: MTC subsidiary Celtel International launches One Network.

Oct 21, 2006: MTC market capitalisation exceeds US$15bn.

December 13, 2006: MTC raises US$1.2bn in Murahaba facility from 29 leading international financial institutions.

January 30, 2007: MTC launches ACE -an implementation strategy to realize the target of the 3x3x3 vision. ACE seeks to extract superior value from existing assets through three main thrusts: Accelerating the growth in Africa; consolidating the existing assets; and expanding into adjacent markets.

March 24, 2007: The MTC-led consortium announces that it has been successful in making the highest bid for the third mobile telecommunications licence in Saudi Arabia (“KSA”) having bid SR22.91bn.

March 25, 2007: MTC’s market capitalisation exceeds USD$20bn.

August 17, 2007: MTC Atheer secures 15-year nationwide Iraq mobile licence for US$1.25 bn.

September 8, 2007: MTC Group’s master brand and four operations in Kuwait, Jordan, Bahrain and Sudan rebrand to Zain.

October 22, 2007: Celtel International, a subsidiary of Zain announces signing of an agreement to acquire 75 per cent of Western Telesystems (Westel) from the Ghanaian government for US$120m. The government remains a 25 per cent shareholder in Westel.

November 22, 2007: Zain subsidiary Celtel International announces the extension of One Network, the world’s first borderless mobile network in Africa to an additional six countries to include Burkina Faso, Chad, Malawi, Niger, Nigeria and Sudan. These countries now join the Republic of Congo, the Democratic Republic of Congo, Gabon, Kenya, Tanzania and Uganda in the network which was initially launched in September 2006 and has been expanded due to increased demand.

December 1, 2007: Zain announced it has concluded a binding agreement for the purchase of 100 per cent of the share capital of Iraqna Company for Mobile Phone Services (“Iraqna”) a subsidiary of Orascom Telecom Holding for US$1.2bn. This acquisition will consolidate MTC-Atheer’s market-leading position in Iraq giving rise to a combined customer base of more than seven million customers.

-Source: Zain Group