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Due diligence holds up Etisalat

Etisalat's has extended its offer to buy Zain for Dh44bn after failing to complete the due diligence process to purchase the Kuwaiti operator by the deadline.

Etisalat said it missed yesterday's deadline to complete its Dh44 billion (US$11.97bn) acquisition of a controlling stake in rival Zain because it did not receive enough information from the Kuwaiti operator.

The UAE's largest telecommunications operator had until yesterday to sign a "definitive transaction" agreement with Zain shareholders that would have given Etisalat a controlling stake in Zain for 1.70 Kuwaiti dinars a share.

However, that agreement was subject to completion of a due-diligence process that began last October.

"The parties have not made sufficient progress towards completion of the proposed transaction in order to meet that deadline due to unforeseeable delays in Zain providing access to all relevant information which is required for Etisalat to complete its due diligence process," Etisalat said in a statement.

The UAE operator said it would continue to work towards an agreement, but it has not disclosed how long it has extended its deadline to negotiate with Zain shareholders.

"The parties do continue to work towards the announcement of a definitive transaction," Etisalat said.

Al Khair National for Stocks and Real Estate, a subsidiary of the Kharafi Group, a major private shareholder in Zain, issued a similar notice on the Kuwait Stock Exchange.

Analysts say the delay should not be viewed as a sign that Etisalat is looking to withdraw its offer to buy a controlling stake in Zain.

"I think it was over-ambitious to finish a due diligence and a definitive agreement in three months. It takes time, so this isn't a big deal," said Irfan Ellam, a telecoms analyst with Al Mal Capital.

"It's just a case of paying a substantial amount of money, so you hope that you have a solid due diligence to base it on."

Kunal Bajaj, a telecoms analyst with HSBC, said it took more than six months for Bharti Airtel to complete its due diligence to acquire Zain's African assets for $10.7bn last June.

"With a company like Zain, I would expect a longer duration to complete the due diligence," Mr Bajaj said.

The transaction would ultimately give Etisalat a 51 per cent controlling stake of Zain, worth 3.36bn dinars (Dh43.84bn) and make the UAE operator the largest Middle Eastern telecoms firm with about 146 million subscribers. The delay in signing an Etisalat deal may give more time for competing bids to develop and entice Zain shareholders.

It emerged last week that Cukurova Holding, a Turkish conglomerate, had made a bid for a 29.9 per cent stake in Zain worth 1.72 dinars a share, but the offer may not be legally valid as it was not posted on the Kuwait Stock Exchange.

Mr Bajaj said Cukurova's offer should not be taken as a serious bid as the valuation was not much more than what Etisalat was offering.

"If the Etisalat deal does not go through for whatever reason, regulator or through due diligence, then [Zain shareholders] have a bid from other players," Mr Bajaj said.

Shares of Etisalat were down 0.9 per cent to Dh10.65 yesterday, while Zain shares were flat at 1.46 dinars.

Meanwhile, Zain's Saudi Arabian unit reduced its net loss for last year's fourth quarter by 21 per cent compared with the same period in 2009 as it boosted its mobile subscription base to 8 million customers. Zain's Saudi unit is a key factor in the Etisalat deal as the UAE company already operates in the kingdom under the Mobily brand. Acquiring the Zain unit would not be allowed by Saudi Arabia's telecoms regulators.

Zain Saudi Arabia posted a net loss of 521 million riyals (Dh510.2m) in the final three months of last year, compared with 657m riyals in the same period a year earlier.

The results failed to meet the expectations of analysts, who forecast that the operator would post a net loss of 431.4m riyals in the quarter.

"The decline in losses for the fourth quarter of 2010 is due to the widening of our customer base, which exceeded 8 million customers and an increase in network coverage," Zain Saudi Arabia said in a statement to the kingdom's stock exchange.


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