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Deal talks between Etisalat and Zain, and VimpelCom and Weather, have the potential to transform the region's telco sector

Tags: EgyptKuwaitMergers and acquisitionsOrascom Telecom HoldingRussiaUnited Arab EmiratesVimpelCom (
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Return to M&A Analysts have long predicted further consolidation in the region's telecoms sector.
By  Roger Field Published  October 6, 2010

In the coming years, 2010 may well be looked back on as a pivotal year in the MEA region's telecoms sector.

While many industry insiders thought that Bharti Airtel's entry into the region earlier this year was going to be the defining deal of 2010, it now looks as though it could come to be viewed as just the first phase in a bigger wave of consolidation.

While Zain's decision to shed most of its African assets to India's biggest mobile operator may have strengthened its position as a viable standalone company, with a renewed focus on the Middle East, it also made it a more attractive acquisition target.

Etisalat had been rumoured to be interested in buying a stake in Zain for a number of months, and it finally confirmed that it had submitted a preliminary offer for the Kuwaiti telco last month.

Some analysts have pointed out that any deal would face significant regulatory obstacles, mainly stemming from overlap between the two groups' operations in Saudi Arabia and Sudan. But Zain is also present in two markets that Etisalat is desperate to enter: Iraq and Morocco.

The UAE firm saw its chances of entering Morocco diminish last month, when France Telecom agreed to acquire a 40% stake in Meditel, the country's second biggest mobile operator. Etisalat's past attempts to enter Iraq, which is now viewed as the Middle East country with the most potential for telcos, were also abortive. By acquiring a 46% stake in Zain, Etisalat would gain both markets at the drop of a hat.

The $12 billion that Etisalat is rumoured to be prepared to pay for the stake also seems like a bargain compared with some of the pre-financial crisis price tags attached to some of the region's telco licences.

Remember that Zain, along with other investors, paid $6 billion to win Saudi Arabia's third mobile licence. For just double that sum, Etisalat could gain entry to Bahrain, Iraq, Jordan, Kuwait, Morocco and, presumably, Zain's build, operate and transfer contract in Lebanon.

Analysts and industry insiders have long been predicting consolidation in the sector, including Zain Group's former CEO, Saad Al Barrack, the architect of the company's over ambitious pre-crisis expansion.

But the potential deal between Etisalat and Zain is not the only deal on the horizon. VimpelCom, Russia's second biggest mobile operator, signed a deal to acquire most of the telecom assets of Egyptian entrepreneur Naguib Sawiris earlier this week.

The $6.6 billion deal, which will see VimpelCom take ownership of 51.7% of Orascom Telecom and 100% of Wind Italy for a combination of cash and shares, is expected to create the world's fifth largest mobile operator by subscribers, with a footprint in Eastern Europe, Africa, Asia and Italy.

Both operators will no doubt benefit from the increased scale of the business. Both operators also have interests in Asia, with Orascom present in Bangladesh and Pakistan, while VimpelCom is present in Vietnam and Cambodia.

Both operators could also benefit from shared lessons from their respective emerging markets. VimpelCom has experience in developing markets including Kyrgyzstan, Kazakhstan, Uzbekistan and Tajikstan, while Orascom is present in African countries including Central African Republic, Burundi, Zimbabwe and Namibia.

However, the deal still faces potential hurdles in the form of the Algerian government, which is keen to take ownership of Orascom's Algerian operation, Djezzy, which also happens to account for about 50% of the operator's earnings. Djezzy was also hit by a $597 million tax bill from the Algerian government last year.

Last week, the operator received another tax "reassessment" from Algeria's tax office, for $230 million, purportedly for 2008 and 2009, although the telco said in a statement that it had already paid its taxes for the years in question.

Speaking at Telecoms World in Dubai on October 6, Djezzy's CEO, Tamer El Mahdi, refused to divulge any details about Djezzy's position in the deal between Weather Investments and said that the negotiations were happening "at the level of Weather and VimpelCom" rather than Djezzy.

But the Russian government appears to be taking the deal seriously, with the country's president, Dmitry Medvedev, due to visit Algiers this week to help remove any obstacles from the deal, according to the Financial Times.

It is also possible that VimpelCom, having witnessed the collapsed deal between Orascom Telecom and South Africa's MTN Group earlier this year, has factored problems in Algeria into its deal strategy, and that a deal will go through with or without the Algerian unit, albeit at a lower price.

Whatever the regulatory hurdles facing the deals between Etisalat and Zain, and VimpelCom and Weather, it looks likely that they will be completed, given the announcements that have already been made.

It is clear that the two deals currently on the table have the potential to reshape the region's telecoms sector if they go ahead.

Etisalat, and particularly VimpelCom, will face significant challenges integrating their new assets if the deals are finalised, and other large operators in the region will no doubt watch their progress with interest.

Indeed, the latest round of consolidation - should it all go ahead - will make further deals more likely, as other telcos in the region will be forced to match their bigger rivals' economies of scale.

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