Etisalat's deal for Zain

Angel Dobardziev/Ovum
Ovum
Last week, Etisalat agreed to buy a majority stake in Zain, valuing the company at close to $12bn. We believe that this is an excellent deal for the al-Kharafi family, a key shareholder in Zain, which earlier sold Zain Africa to Bharti Airtel for $11bn. Like Orascom, which was recently acquired by VimpelCom, Zain was clearly a financial investment rather than a strategic play, which companies such as Etisalat, STC, and Qtel have all focused on.
 

The deal will propel Etisalat into the leading position among the major Middle Eastern operators, and it will be interesting to see how STC and Qtel respond. By purchasing Zain, Etisalat will gain a growing, well run, and highly profitable business.

 
However, it is also adding significant complexity to its already diverse operations which span Asia, the Middle East, and Africa. Managing its diversity effectively will be important to Etisalat realizing synergies across its operations, but it could also become a significant distraction to senior management.
 
Zain: a financial, rather than strategic investment
 
We believe that the sale of Zain to Etisalat and the recent acquisition of Orascom by VimpelCom marks the beginning of the M&A end-game in emerging markets. Most investors are aware of the increasing competition and slowing customer and revenue growth that are continuing to put downward pressure on the growth prospects of emerging market telcos such as Zain.
 
This is usually the time when financial investors exit the market, cashing in on the attractive valuations of their investments. These financial investors are then replaced by strategic investors that take a longer-term view and look for synergies with existing operations.
 
The sale of Zain and Orascom indicates that the leading investors of both companies are financial investors, while buyers such as Etisalat, Bharti (which bought Zain Africa earlier this year), and VimpelCom are clearly strategic investors.
 

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