Zain Bets Billions on Emerging Markets

Emerging markets carrier Zain Group is spending $1.2 billion to strengthen its mobile business in Iraq and is increasing its share count by 75 percent to build a war chest for further expansion. (See Orascom Agrees to Sell Iraqna and Zain to Raise Funds.)

The Kuwait-based operator, also known as Mobile Telecommunications Co. (MTC) , is buying Orascom Telecom 's Iraqna operation for $1.2 billion, a move that will take its mobile customer base in Iraq from 3.8 million (40 percent market share) to more than 7 million (72 percent market share). (See MTC Rebrands as Zain.)

That takes Zain's investment in Iraq in recent months to nearly $2.5 billion -- in August it secured one of three national mobile service licenses with a bid of $1.25 billion, and now plans to offer GSM services throughout the war-torn country.

Zain recently reported it had 3.8 million mobile subscribers in Iraq at the end of September, up 55 percent from the 2.44 million it had a year earlier. The operator believes Iraq offers significant mobile growth potential, as only about 33 percent of the population currently has a mobile account and the country's fixed line penetration is very low, at just 2 percent.

That growth potential wasn't enough for Orascom, another of the leading emerging market operators, to stick around, though. "We have built a very successful and profitable operation in Iraq despite a very difficult operating environment... [but] the potential returns of Iraqna did not satisfy our targeted return on equity for the associated high risk of the operation," stated Orascom chairman Naguib Sawiris in an official statement.

Orascom had, until very recently, decided to expand its Iraq operations, having struck a joint venture agreement with another of Iraq's three national license holders, Korek Telecom, in September. However, Orascom noted that the two parties had "not been able to reach a satisfactory agreement" about how to manage the venture. (See Orascom Forms Iraq JV.)

The acquisition of Iraqna, which has about 3 million subscribers, will boost Zain's consolidated customer base by around 8 percent. At the end of September this year, Zain had 36.5 million customers across its six Middle Eastern and 14 African operations.

And the company is expanding rapidly into new markets: It plans to launch mobile services in Saudi Arabia early in 2008, and recently acquired a licensed business in Ghana to add to its African presence. (See MTC Receives Saudi Approval and Celtel Acquires Westel.)

Now it plans to raise billions of dollars to fund its growth plans. The company announced today it will increase its capital by 75 percent, which at existing stock levels should mean the issue of around 1.42 billion new shares. Each new share will raise 0.85 Kuwaiti Dinar ($3.10), putting the value of the new capital increase at KD1.21 billion ($4.4 billion).

In the press release about the share issue, Zain's chairman Asaad Al-Banwan stated: "Zain has consistently gained a reputation as a frontrunner when it comes to seizing and acquiring new investment opportunities in the regional markets... the recommended capital increase will certainly bolster the Group's ambitions of becoming one of the top-10 telecom companies in the world by 2011."

Zain's share price was up Monday by 0.5 percent at KD3.88 on the Kuwait Stock Exchange.

The carrier recently reported revenues of $1.5 billion and net income of $352 million for the third quarter, financials that put it very close to a place in Light Reading's Emerging Markets Carriers Top 10.

Orascom, which has 64.7 million subscribers in multiple African and Asia/Pacific markets, is also knocking at the door of that Top 10. Today it announced revenues of $1.24 billion and net income of $257 million for its third quarter. (See Orascom Reports Nine Months.)

— Ray Le Maistre, International News Editor, Light Reading

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