Sunday, Jan 16, 2011

(Recasts, adds details, background.)

DUBAI (Zawya Dow Jones)--Emirates Telecommunications Corp. (ETISALAT.AD), the region's biggest telecom provider by market value, said Sunday it failed to complete due diligence on the acquisition of a 46% stake in Kuwait's Mobile Telecommunications Co. (ZAIN.KW), or Zain, before its Jan. 15 deadline, but it continues to work towards clinching a deal worth about $12 billion.

"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," Abu Dhabi-based Etisalat said in a short emailed statement.

Etisalat in late September offered to buy the 46% stake in a deal worth about $11.7 billion, making it potentially one of the biggest corporate transactions of recent times in the Middle East and fueling Etisalat's regional expansion strategy.

Analysts Sunday expressed little surprise in the failure of both parties to strike a definitive accord before the Jan 15. cut off.

"I think it was ambitious to try and finish the due diligence in three months, but if you are paying that amount you want to know what you are buying. I think [the postponement] is not a big issue," said Irfan Ellam, vice president of equity research at Al Mal Capital in Dubai.

At 0635 GMT, Etisalat shares were 0.5% lower at AED10.70, while Zain shares were yet to trade. They closed Thursday at KWD1.46.

If a deal is does eventually go through Etisalat will gain access to fresh markets in the Middle East and North Africa, including Iraq, Kuwait, Bahrain, Morocco and Jordan. Iraq, in particular, has been a focus for Etisalat but it has so far been unable to get a foothold there.

A sticking point for the deal has been the fact that Zain and Etisalat both operate in the Saudi market, an issue that could rankle the local regulator.

SAUDI ISSUE

Etisalat said in November that the proposal was subject to several conditions, including the disposal of Zain's entire stake in its Zain Saudi unit. Etisalat operates Etihad Etisalat, or Mobily in Saudi Arabia.

Etisalat also said in November that other conditions include the completion of satisfactory due diligence, the receipt of all applicable regulatory approvals, and having no material adverse change in Zain's business, financial or regulatory affairs.

For Zain, however, ceding so large a shareholding would come as a blow for a company that had aspired to become a top-10 global player by the end of 2011. Zain sold most of its African assets last year to India's Bharti Airtel Ltd. for $10.7 billion, leaving the smaller company vulnerable to takeover attempts.

The offer from Etisalat has caused a dispute among Zain's majority and minority shareholders. Al Fawares Holding, which holds a 4.5% stake in Zain, lost a lawsuit in December to stop the due diligence process. The minority shareholder said that opening the company's books represented a threat to the company.

The Etisalat, Zain deal is also part of a larger merger and acquisition trend in the Middle East. Persian Gulf telecommunications operators, flush with petrodollars, are increasingly venturing abroad for new sources of income as domestic monopolies end and the penetration of mobile-phone service has reached 100% in some markets.

The buyouts had been driven by limited growth prospects in most of the bigger markets and falling profit margins that may come under further pressure due to possible tighter regulation and increased competition, Fitch rating service said in a recent report.

-By Shereen El Gazzar, Dow Jones Newswires, +9714 446 1684 Shereen.elgazzar@dowjones.com

Copyright (c) 2011 Dow Jones & Company, Inc.

(END) Dow Jones Newswires

16-01-11 0642GMT