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Wealth fund holds key to Qtel’s $2.2 billion Kuwaiti bid

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Qtel offered 2.6 dinars/share for remaining Wataniya stake; Kuwait's sovereign fund has 23.5 pct stake in Wataniya; Fund yet to decide on its Wataniya stake

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August 29, 2012 5:54 by



As Qatar Telecom (Qtel) dangles a $2.2 billion bait to persuade minority shareholders in its Kuwaiti unit Wataniya to sell out, it knows one major investor is positioned to frustrate its goal of 100 percent control.

Step forward the Kuwait Investment Authority (KIA), the sovereign wealth fund whose 23.5 percent stake in Wataniya makes it the second biggest shareholder and puts it in prime position to decide the fate of Qtel’s offer for the 47.5 percent it does not already own.

Qtel bought its controlling stake in 2007 but has now decided to seek full control, capitalising on Wataniya’s weak share price and completing the takeover of a company with attractive growth prospects in emerging markets such as Algeria and Tunisia.

Qtel’s 2.6 dinars per share offer isn’t contingent on the KIA’s acceptance, but its decision may weigh heavily on other minority shareholders. Equally the KIA must figure out if it’s happy being left with a holding in a company with an increasingly dominant major shareholder or would be better off bailing out.

Its decision may have further ramifications, offering insight into its strategy for a telecoms portfolio which also includes part of two other Kuwaiti telecom firms, Zain and unlisted Viva.

“The KIA is not desperate to earn a slight premium and cash out. They are long-term investors and this is a national asset. It will be interesting to see what stand they take,” a banker to the telecoms sector said, declining to be named as he is not authorised to talk to media.

The $300 billion wealth fund, one of the largest in the world, has yet to decide to tender its Wataniya stake to the offer, a source familiar with the matter said earlier this month. The offer is valid until Oct. 4.

MAXIMUM RETURNS

There is already at least one past example of its thinking.

In 2010, when United Arab Emirates Telecom Company Etisalat bid around $12 billion to take control of Zain, the fund was not willing to sell its holding, a second banking source said. Etisalat eventually pulled its bid.

Whether or not the KIA stands against the Wataniya offer remains to be seen.

“At the end of the day, the KIA is a financial investor looking to generate maximum returns on its investment. The fact that they were not sellers during the Etisalat bid does not mean they won’t be sellers now,” the source said.

For Qtel, which paid $3.2 billion in 2007 for 51 percent of Wataniya, the logic for a full takeover seems obvious.

Wataniya shares had fallen well below their peak around 3 dinars set in mid 2007 and were well below the targets of some analysts, who argue that investors were failing to take account of its revenue growth prospects, high cash flow and low debt.

The shares have caught up with the 2.6 dinar offer price, rising nearly 18 percent in the last two weeks and more than 30 percent year-to-date. But the offer price is below some valuations.

Morgan Stanley values the stock at 2.75 dinars, EFG Hermes at 3.07 dinars and Bahrain-based Securities & Investment Co (SICO) at 3.06 dinars.

The disconnect is due at least in part to a wider malaise in Kuwait’s stock market, which has been hurt by opaque trading practices and political tensions that have scuppered a 30 billion dinar ($107 billion) state development plan and scared off foreign investors.

Yet the undervaluation has given Qtel the chance to become the first Gulf company to gain full ownership of a listed telecoms operator in the region, at a possibly knockdown price.

MAIN RISK

“This type of transaction removes one of the main risks in an acquisition: it’s something you control so you’re ideally positioned to evaluate it,” said a Dubai-based banker who spoke on condition of anonymity.

“Buying out minority stakeholders is something the big European operators did a few years ago. These deals are simpler and much more likely to create value.”

Wataniya had long-term debt of just 98 mln dinars at the end of 2011 and its net operating cash had grown to 292 mln dinars from 196 million a year before.

Its revenue will likely grow by between 8 and 9 percent annually through the next three years, according to Nishit Lakhotia, telecoms analyst at SICO.

A Wataniya deal would complete a busy few months for Qtel, which completed a $1.9 billion rights issue in May and agreed in June to double its stake in Iraq’s No. 2 telecoms operator, Asiacell, to 60 percent for $1.47 billion.

There could be further scope for deals.

With subscriber growth stagnating in Gulf telecoms and margins – and often profits – in retreat due to stiffening competition and surging use of internet-based phone calls, industry experts have long called for consolidation in the sector.

They argue smaller firms should merge with multi-country operators such as Qtel, Saudi Telecom andEtisalat of the United Arab Emirates.

Eight of the 12 listed Gulf operators are ultimately government-run, and these owners prioritise control over profit – but Qtel’s move could conceivably spark a rethink, as well as enacting Qatar’s investment priorities.

“Qtel is after all only embarking on the strategy of its state, which is to make targeted opportunistic acquisitions at attractive valuations and expand its regional and global presence,” the banking source said. “As a target, Wataniya fits in perfectly with that strategy.”

(Editing by Andrew Torchia and David Holmes)



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