Emerging-market telecoms: Will the valuations stay around for a year or two ?

Emerging-market telecoms: Emerging-market telecoms are in hot demand – so much so that the valuation attributed to Kuwait-based operator Zain Telecom by a consortium of Asian investors seems, well, zany.

Emerging-market telecoms: Emerging-market telecoms are in hot demand – so much so that the valuation attributed to Kuwait-based operator Zain Telecom by a consortium of Asian investors seems, well, zany.

India’s Vavasi Group and Malaysian billionaire Syed al-Bukhary have provisionally agreed to pay $13.7 billion for a 46 per cent stake in Zain, according to Kuwait’s Kharafi Group, the family conglomerate leading the selling shareholders.

The implied near-$30 billion valuation for Zain looks rich. The price of 2 Kuwaiti dinars per a Zain share is equivalent to a premium of 89 per cent on the July 9 market price. That was when the group revealed it was in separate talks to sell a majority stake in its African assets to French conglomerate Vivendi. The African business accounts for roughly 60 per cent of Zain's total customers and 15 per cent of net profit. The talks with Vivendi subsequently collapsed.

The Asian deal values Zain at 10 times this year’s forecast ebitda. The valuation may be less toppy after factoring in the lower tax rates in Gulf markets. The Middle East is considered mature in terms of mobile penetration, even if Zain is exposed to high-growth markets in Africa. But it's hard to see why Zain is worth a lot more than the 7-times-ebitda that Vivendi is now looking to pay for GVT in Brazil, another fast-growing market.

What’s more, Zain’s new Asian investors aren’t even getting a majority stake. The 46 per cent holding will sit alongside the Government of Kuwait’s 25 per cent investment. True, the government is understood to have just one board seat. And it has been content to let the Kharafi Group control half of the board with a direct stake of less than 15 per cent, according to bankers close to the company. But there is no guarantee that Zain’s new foreign owners will have as much influence with their holding in the poorly regulated Kuwaiti market.

In any case, this does not sound like a done deal. Little is known about India’s Vavasi Group, and the bidding consortium may yet grow to include two more Indian state-controlled telecom companies. The Asian investors also appear to remain undecided how the purchase will be carved up between them. The source of funding is also unclear. If this actually comes off, it will be a great deal for the vendor. But that is still a big if.

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