Executive Summary
The Zain Group won the bid to be the Kingdom of Saudi Arabia’s third mobile service provider in July 2007. In a highly competitive bid, the firm managed to secure the GSM/3G operating license for an overwhelming $6.1billion. The concession would last for 20 years, and is renewable for an additional five years.
While the prospects presented in the Saudi Arabian telecoms market may have justified this cost, it is evident that paying this large amount of money was the first mistake that Zain KSA ever did. This is especially so because the firm was not able to independently raise the $6.1billion, and therefore depended on the domestic market to raise the balance. As a result, the firm started its operations with a huge debt on its shoulders.
Zain KSA’s operations in the Saudi telecoms market was further complicated by the fact that its competitors (STC and Mobily) had already gained considerable market share. More so, the two firms had already established strong network infrastructure, with Mobily riding on STC’s network as dictated by the former’s concession terms.
The good performance for Mobily and STC served to Zain KSA’s disadvantage. This is especially so because the latter has to contend with balancing its resources between marketing its products, laying the necessary network infrastructure and monitoring recent developments in the market.
Regardless of the various challenges faced by Zain KSA, the prospects for growth in the Saudi telecoms market are promising. However, before the firm can fully utilise the opportunities coming its way, the management and stakeholders must devise a viable way through which the firm can effectively manage its high debt burden.
Some of the options that the firm can consider include a rights issue, a debt swap or a financial advance from Zain Kuwait. On the management front, the firm need to consider a change in its management, and adopting a differentiation strategy.
Introduction
Zain is a mobile phone company operating in the Middle East and until recently, Africa. The Zain Group whose headquarters are in Kuwait acquired a license to operate in Saudi Arabia in July 2007.
A year later in August 2008, the Kingdom of Saudi Arabia’s branch of Zain (hereunder referred as Zain KSA) officially launched its operations in the country. With Saudi Arabia being the largest country in the Middle East, the prospects for Zain KSA were quite promising.
Despite being a late entrant in the market, the Saudi telecommunication industry was relatively unutilized, hence suggesting that the company could not face overwhelming entry barriers. Specifically, Zain KSA had to contend with only two other mobile service providers namely, the Saudi Telecom Company (STC) and Mobily (Oxford Business Group 138).
Two years after Zain KSA launched its operations, it is clear that the scenario has not turned out as well as the planning department had anticipated. It is for this reason that this research paper seeks to review recent trends in Saudi Arabia’s communication industry, as well as other factors that may be slowing down Zain KSA’s performance in the otherwise stable economy.
Research Methodology
This research will be conducted by reviewing relevant news items as well as scholarly journals or books, which have highlighted the case of Zain’s operations in the Saudi Arabian Kingdom, or/and the bigger scenario affecting operations in the Kingdom’s telecoms sector.
Zain’s Background in Saudi Arabia
Zain officially entered the Saudi Arabia communication sector in January 2007 when it acquired its operating license. Although the first call connected on the Zain network was made in February 2008, it was not until August 2008 when the company officially launched its operations in the country (Zain.com).
By the time of the launch, Zain had not only invested $1.3 billion in establishing and expanding its network in 43 Saudi cities, it had hired an excess of 2,200 staff members to aid in its operations in the country (Zain.com). Aptly described, the company had spared no expense in setting up the basic infrastructure needed in delving into full-scale operations in its newly acquired market.
In an action that can be interpreted as Zain’s portrayal of commitment to the Saudi market, the company listed its shares in the Saudi Stock Exchange in March 2008. By doing so, the company not only raised additional funds needed in reinforcing its operations in Saudi Arabia, it also became a publicly owned company. Zain also introduced the 3-generation and 3.5-generation services in order to attract internet users.
This was in addition to the voice services, MMS and SMS services and SIM applications such as subscription channels, games, downloadable pictures and other applications specifically meant to have a ready market in the youth market. The mobile company’s efforts seem to have born relatively good fruits because eight months into its operations in the Kingdom, it has registered an excess of 22 million subscribers, and had gone beyond the revenues projected for the company for the same period by 27 percent (Bloomberg).
Despite the fact that Zain entered into the KSA market at a time when only two other mobile phone companies existed, the firm seems to have missed some of the excitement that spearheaded Mobily’s wide success in the same market.
Soon after the country liberalized its telecoms sector, Mobily successfully bid to be the second GSM provider in the Kingdom. It formally launched its Saudi operations in 2005 (Oxford Business Group 138). At the time, the mass market was craving for an additional provider to challenge the monopolistic tendencies created by STC.
For that matter, Mobily was embraced by many Saudis, leading to the company gaining 34 percent market share by the first two years of its operations (Oxford Business Group 138). Combined, both TSC and Mobily has managed to acquire 82 percent market share by 2007 when Zain won the bid to be KSA’s third GSM/3G provider.
That meant that in addition to fighting for the remaining 18 percent market share, Zain would have to use tactics that would compel users from either STC or Mobily to shift allegiance to its network if it was to gain considerable market share. This was a tall order for a new firm operating in a rather rigid culture as experienced in Saudi Arabia.
Statement of the Problem
In the current year (2010), Zain KSA has been in the news for all the wrong reasons. First, the firm has been on a loss-making streak for the better part of 2009, and second, its poor financial performance had made it default on some of the payments owed to creditors including a $ 2.5 billion loan owed to an Islamic Bank (Elias).
This then begs the question: What did Zain do wrong in implementing its Saudi strategy? More so, when and why did things start going so terribly wrong? What are some of the contributing factors that led to Zain KSA’s current situation? Are there lessons to be learnt? Finally, this research will seek to investigate some of the remedies that Zain can use in order to regain its footing in the Saudi Market.
Historical Background of the Problem
The lure for great prospects in the Saudi Arabian telecoms market must have convinced the Zain Group that getting a GSM/3G operating license in the Kingdom of Saudi Arabia (KSA) was necessary regardless of the cost. This explains why the group went ahead and bought the license at $ 6.1 billion for a 20-year concession, with an additional five years period. According to the (Oxford Business Group 138), the fee paid by Zain was almost twice what Mobily had paid three years earlier for its GSM/3G operating license.
The latter had paid a fee of $3.45 billion for a 20-year concession. Any nonprofessional would readily tell that Zain KSA no doubt got lesser value for more money. Even if inflation was to be factored in, there is no doubt that Zain KSA’s concession coming only three years after Mobily’s was expensive. It is evident the firm paid dearly for a concession to operate in a market where the other two competitors had already gained considerable market share.
Notably, the monopoly sick Saudi market had a warm reception to Mobily’s entrance to the extent that the firm has managed to get a third of Saudi’s GSM market and an additional three-quarters of the country’s 3G market (Oxford Business Group 138). To date, Zain has only managed to capture 13 percent of the GSM market in the Middle East country and an average approximate value of 8.5 percent total revenues generated in the telecoms industry (Al Rajhi Capital (a) 2).
Too expensive a license
The first causative factor that could have pushed Zain to its current situation in the Saudi Market is probably spending too much money on acquiring the license to operate in a market whose performance certainty was in doubt. Understandably, there are push factors that [may] have contributed to the high price, and the urge by Zain to acquire the same. First, the number of mobile phone operators bidding to win the third GSM/3G license could have cast the wrong impression about the potential of the Saudi Arabian market.
According to the (Oxford Business Group 138), the nine founding shareholders in Zain KSA only managed to raise 40 percent of the total money required to purchase the operating license and lay the basic infrastructure needed to commence operations.
For that reason, the company scheduled to hold an initial public offering (IPO) in March 2008 with the intention of raising 7 billion Saudi Riyals. With Zain being a Kuwait-based company, its investment in Saudi Arabia had to meet an obligation of selling 50 percent of the shares to Saudis. This partly explains why the IPO came so soon after the license to operate was granted.
As noted by (Geddes 24) raising capital through an IPO has its advantages as well as disadvantages. The advantages include enhanced liquidity, enhanced company image; access to capital, and employee and management motivation. Disadvantages on the other hand include increased disclosures, IPO-related costs, less control powers vested on the management, problems rising from separating company ownership and management control, and pressure to meet investor expectations.
While increased disclosures could be beneficial for the sake of increasing transparency in a public owned company, it exposes the firm to speculation as well as heightened public criticism. Looking at Zain KSA for example, its financial performance disclosures have been subjected to media analysis, which in turn creates public awareness about its loss-making and huge net debt. As a result, the public has lost confidence in the firm’s share, thus explaining the low volumes traded on the share and the accompanying low prices.
Concerning control powers vested on the management, the majority shareholder in Zain KSA is Zain Kuwait, which owns 25 percent of the company. The other two majority shareholders have 6.9 percent stake each. This means that the three biggest shareholders command a 38.8 percent stake in the company, which is still inadequate to command the management powers.
In cases where decision needs to be made, wider consultations with retail shareholders are therefore inevitable. The time consuming nature of consultations was evident in the delay Zain KSA has had to endure in 2010 as it contemplated on the best way to lessen its debt. According to (Shamseddine 1), the Zain KSA’s Chief Executive Officer, Dr. Saad Barrak declared in early 2010 that the firm had no option but to result to a capital hike in order to lower its debts.
However, the CEO also stated that reaching a decision on how to secure a permit from the stock market, and how to go about implementing the capital hike, also known as a rights issue, was not a simple thing to do. “Before the Rights Issue is carried out, the company proposes to recommend to shareholders that they approve the reduction of the company’s current share capital …through the cancellation of 667,156,115 shares” (Mesbah 1).
No doubt, Zain KSA’s management has already decided that capital reduction is the best way to eliminate the accumulated losses. However, convincing the public shareholders that capital reduction is the best way to go, especially considering that they (shareholders) will own fewer shares when the plan is implemented, may not be an easy undertaking.
Main Players in Zain KSA’s Problems
In addition to the hurdles imposed on the management’s decision-making abilities by the shareholding majority, Zain KSA will have to obtain approvals from relevant government regulatory authorities, and this too may take time. The firm will need to obtain separate approvals from the Ministry of Commerce and Industry as well as the Capital Market Authority (Mesbah 1). This would not be as complicated were it not for the fact that Zain KSA is a public company through the fact that it sold its share to the public.
Policy guidelines adopted by KSA are also partly to blame because all foreign companies operating in the company must meet the requirement of selling at least half of their firm’s stake to the Kingdom’s nationals or corporate organisations (Mesbah 1). Zain KSA’s decision-making abilities are further complicated by the fact that the management will need to get approvals from all its lenders before proceeding with the proposed rights issue.
In the event that Zain KSA gets all the necessary approvals, the question about whether the public would trust the firm enough to commit further funds into it remains. Notably, the company is riding on the hope that it has managed to build a “viable and highly successful operator that is delivering a mobile experience of international standards to customers” (Mesbah 1).
More to this Zain KSA’s CEO, has been quoted expressing his optimism that the “slight hiccups” experienced by the firm are not an indication that the firm cannot perform as well or even better than its competitors in the Saudi Arabian market have. He still regards the Saudi Arabian telecommunications market as full of growth potential, and thus argues that additional capital would help Zain KSA grow to an organization able to take advantage presented in the Saudi market (Mesbah 1).
Stiff competition
One cannot fully comprehend Zain KSA’s position without fully understanding the strong and weak points of the firm’s two main rivals (STC and Mobily). STC gained its operating license in 1998 and enjoyed monopolistic powers in the Saudi market until 2005 when Mobily was launched. This means that STC had 10-year head start advantage, while Mobily had three-year advantage over Zain KSA. Below are some additional details about the two firms.
STC
STC is the pioneer telecommunications company in Saudi Arabia. The firm changed hands from government ownership to private ownership in 1998 (Al-Daweesh 19). Adopting an integrative approach to service delivery, STC became the first ever-Saudi company to offer mobile-telephony services, internet services and fixed-telephone services to the Saudi populace. It operated as a monopoly until 2005, when the second mobile operator won the GSM/3G license to operate in the Kingdom.
Being the only operator in KSA at the time, STC took advantage of the vast market to provide integrated services, which were intended to serve the aspirations and needs of the Saudi market, a feat it attained with considerable success (Al-Daweesh 19). Its early penetration also gives it some mileage over the other operators especially in the corporate and wholesale telephony segments.
According to (Hoteit and Nawani 3), the corporate market is approximately SAR 29 billion big, yet only STC has managed to penetrate it over the years. Although specific statistics about STC penetration have not been given, the authors note that the corporate sector is largely underpenetrated and could hence be a good expansion ground for Zain KSA as well as other mobile telephone service providers.
As part of STC’s competitive strategy, the firm targets both business and individual segments with its telephone and internet services. As the only telecom company giving fixed telephony services to the Saudi market, STC has a clear bottom-line advantage over its competitors.
The fact that it was launched at a time when the Saudi masses were eager to embrace mobile telephony like the rest of the world has also made an immense contribution to its subscriber base. By the time the second mobile operator was launched, STC had already gained 40 percent penetration in the Saudi market (Oxford Business Group 138).
The most relevant distinguishing factor that STC holds over Zain KSA is the fact that it has rolled out its operations in almost every town and village in the vast Middle East country (Al-Daweesh 19). More impressive is its up-to-date infrastructure, which has seen to the company registering a 29 million mobile phone users, 4.2 million fixed-phone users, and 1.5 million internet users (Al-Daweesh 19).
Compared to Zain KSA, STC registered profits in the 2009-2010 financial year, therefore winning the confidence of shareholders as well as customers. The firm spends part of its profits on corporate social responsibility programs thus cementing the STC-consumer relationship further.
Like any profitable company that realizes that competitive pressure could pose major challenges in future, STC has continued to expand, update, and develop its services and has adopted a competitive pricing strategy in order to retain its wide customer base (Al-Daweesh 20). STC’s strategies no doubt have had a negative impact on Zain KSA’s ability to get a grip on the Saudi market.
This is especially so because of all the services provided by Zain KSA, STC has them in better, more affordable, and easily accessible packages. Most notably, STC has even launched the 3G internet service that it initially lacked. The service is registering considerable success throughout the kingdom (Al-Daweesh 20).
Faced with such stiff competition, and having no specific differentiating factor between it and other players in the market, Zain KSA would need to adopt a more innovative marketing strategy if it is to succeed in convincing some of the mobile users already subscribed to STC to shift to the Zain network. Overall, STC continues to be the strongest telecommunications provider gauged on its subscriber numbers, as well as revenue generation.
Mobily
After successfully winning a $3.46 billion operating license bid in 2004, Ettihad Etisalat entered the KSA mobile phone market and adopted Mobily as the operating name (Pyramid research).
Unlike Zain KSA which sought to establish the basic technical infrastructure right from the very start, Mobily with the help of communication regulator in the Kingdom had signed a cooperation agreement with STC to use the latter’s network during the first four years of operations (Pyramid Research).
This means that unlike Zain KSA, which had to consolidate funds to acquire the operating license and lay the basic operation infrastructure, Mobily had the advantage of using its competitor’s network for an agreed period.
While this strategy was not without risk, it gave Mobily a chance to break even and invest in its infrastructure development over the four-year period. Notably, the cost of using the STC’s network platform had been factored in the $3.46 billion operating license fee thus meaning that the firm did not have to undergo further costs securing STC’s network over the four-year period.
Pyramid Research notes that initially, Mobily had targeted to capture the high-end market consumers especially in the data market. This was a splendid idea that gave it a competitive advantage; especially considering that STC did not have a 3G mobile communication network by the time Mobily entered the market.
Over the years however, the company has thrived in flexibility and has focused on reducing tariff rates, establishing niche markets, and focusing on post-paid subscribers. Some of the competitive areas that Mobily targets include reducing international call rates to 0.60 Saudi Riyals during a promotion phase that lasted between April and May 2010. Sensing the competition, Zain KSA followed this example and introduced a 25 percent cost reduction on all international calls (Pyramid Research).
Mobily also caters for niche markets such as female subscribers or people from other countries. Specifically, the firm has a special tariff for women dubbed “Nejmah” and a different tariff dubbed “Mabuhay” for Philippines’ citizens working and residing in the Kingdom of Saudi Arabia (Hoteit and Nawani 2).
The (Oxford Business Group 138) has noted that mobile phone operators in KSA face increasing challenges in differentiating their services. This is especially so since the top ranking providers offer voice and data services at almost similar prices. Notably, Mobily is differentiating itself from the others by targeting the niche markets. Observably, this is something that Zain KSA is yet to accomplish.
In the second quarter of 2008, Mobily had established itself as household name in 3G internet service provision covering a combination of 70 governorates, towns and cities in the KSA (Al Gadheeb 36). In addition to niche marketing, which has been established as the firm’s main differentiating characteristic, (Al Gadheeb 38) also states that Mobily no longer concentrates on the price wars that have characterised the KSA mobile telephony market in the past.
Rather the firm focuses on developing customer-specific product solutions. (Al Gadheeb 38) explains that in order for Mobily to meet the target of developing customer-specific product solutions, it has had to engage management experts from different places in the world. A case in point is the firm’s engagement with Management Centre Europe as outlined by (Al Gadheeb 36).
Evidently, Mobily had realised that operating in a reserved market like Saudi Arabia did not make international business practices irrelevant. In a global market place where best practices in business can be replicated in different countries with equal success, Zain KSA could borrow some lessons from Mobily’s engagement with Management Centre Europe.
This assertion however is not meant to negate the special challenges raised by the Saudi culture as discussed elsewhere in this research paper. Rather, it is a suggestion to the effect that best business practices can be modified to fit certain cultures without having to re-invent the wheel.
Zain KSA notably lags behind STC and Mobily in some of the vital undertakings that could earn it mileage in the Saudi Market. A specific example was in the rolling out of mobile broadband infrastructure. According to (Hoteit and Nawani 2-3), both STC and Mobily had already concluded their respective long-term evolution broadband network trials by March 2010. By May 2010, Mobily had further completed trials on its ‘High-Speed Packet Access’ (HSPA+) services (Al Gadheeb 39).
Zain on the other hand, only signed a long-term evolution broadband network contract with Motorola in the second quarter of 2010. This suggests that the firm is rather sluggish in adopting some of the technological advancements that appeal to the youth market as well as technology-savvy older consumers. As a result, it could lose out even some of its subscribers who like enjoying new technology as soon as it appears in the market.
According to (Hoteit and Nawani 3), statistics released after the 2010 first quarter, indicate that STC is the market leader with 44 percent market share, closely followed by Mobily with 40 percent market share, and finally Zain KSA with 16 percent market share. With the exception of STC, the two other mobile service providers marked a one percent growth compared to the same period in 2009. Most notable was Zain KSA’s revenue market-share increase from one percent in 2008, to seven percent in 2009 (Hoteit and Nawani 3).
Considering that STC’s revenue decreased with an 11 percent margin over the same time, one can easily conclude that Zain KSA’s revenue improvement was at STC’s expense. This suggests that the Zain case is not hopeless and that [maybe] the management can identify and utilise the right strategic measures to help the firm overcome the prevailing handicaps in order to start making profits and repay its debts.
CHALLENGES, ISSUES AND PROSPECTS
Challenges and Issues
The high debt burden borne by Zain KSA currently remains the single most challenge in the company’s operations (Al Rajhi Capital (a) 1). This is especially so because the burden has over the past three quarters of 2010 and the better part of 2009 reduced the enterprise value of Zain KSA shares thus negating the equity attributable to shareholders. As a result, most shareholders, though knowledgeable about the firm’s bright future prospects in the KSA telecommunications market, could easily start losing confidence in it.
According to (Al Rajhi Capital (a) 1), Zain KSA urgently needs to devise strategies through which is can reduce its debt burden to reflect at least 1-times its sales. Currently, the debt burden stands at 2.4 times its projected 2010 annual sales. In research projections by Al Rajhi Capital (1), it is estimated that the company will register sales worth SAR 5.4billion in 2010.
The debt burden is making the Zain KSA’s financial situation worse as each year passes. As (Al Rajhi Capital (b) 1) notes, the high net burden increases with each defaulted payment and consequently, the firm has to foot even higher costs. In a candid example, (Al Rajhi Capital (b) 1) explains how Zain KSA’s creditors negotiated for increased interest rates in 2009 especially after the firm defaulted on its payments.
As a result, the firm’s financial costs were on an all time high of SAR 227million since the annual interest rate was re-negotiated to a higher rate of 7.3 percent. While Zain KSA’s competitors also have debts, (Al Rajhi Capital (b) 1) notes that none of the two firms has to grapple with interest rates as high as 7.3 percent applicable in Zain KSA’s case. This means that both Mobily and STC have some financial advantage over Zain KSA.
While this essay does establish that lowering its debt burden is the solution that Zain KSA might need so badly in order to end its short-term problems in the market, the question about how best to go about lowering the debt still persist. According to (Al Rajhi Capital (a) 1), Zain KSA has several options it can utilise. However, none of the available options has guaranteed results.
First option: a Rights issue
According to (Chadra 328), a rights issue “involves selling securities in the primary market by issuing rights to existing shareholders”. One of the identified advantages of a rights issue is that the firm’s control will not be diluted further. However, since a rights issue targets raising capital from the existing shareholders only, it severely limits the financing options that the firm has (Chandra 284).
In Zain KSA’s case, the situation is especially tricky. According to (Al Rajhi Capital (a) 1) Zain KSA will not have an easy time staging the rights issue because two predominant factors may complicate the process. First, the desire to preserve the present shareholding without diluting the firm’s control may hinder the process.
Most notably, the firm’s founding shareholders who may want to retain its control own 51 percent of the shares. If the status quo were to remain, Zain KSA would therefore need to stage a rights issue that does not give too many powers to current minority shareholders (Al Rajhi Capital (a) 1). The second factor that may complicate the process of setting up a rights issue for Zain KSA is the fact that the nominal value of the shares was placed at SAR10.0.
To convince existing shareholders to participate in the rights issue therefore, the firm would need to give them an attractive discount (Al Rajhi Capital (a) 1). This means pushing the share price one or two riyals up. With the stock performing so dismally in the present financial markets, there is no easy answer to how the firm can successfully manage to push the stock’s price up, to either SAR 11.0 or SAR 12.0.
Second Option: Debt-for-Equity swaps
In the event that the rights issue fails to raise all the desired capital needed to offset part of Zain KSA’s debt, the firm may have no option but to swap some of its equity to settle debt to its creditors. Most notably, (Al Rajhi Capital (a) 1) observes that the founding shareholders may have to advance Zain KSA some SRA 2.9billion in exchange with equity.
However, even if this were to happen, an additional SAR 3.9billion would need to be raised in order to hit the SAR 6billion mark needed to settle part Zain KSA’s overwhelming debt (Al Rajhi Capital (a) 1). Another option open to Zain would be to swap part of the SAR 9.1billion Islamic loan the firm owes Murahaba Bank with Equity. The latter option is however subject to Murahaba Bank willingness to become part of Zain KSA’s shareholders.
Whatever angle one looks at Zain KSA’s debt situation, there is no doubt the firm has tough choices and essential decisions to make. However, like every good business entity would know, tough financial times are not always an in indication of tough times ahead. It is for this reason that this research paper looks at some of Zain KSA’s prospects going forward.
Zain KSA’s prospects
Zain Groups African deal with India’s Bharti Airtel Limited
In June 2010, Bharti Airtel Limited finally sealed the deal to purchase Zain Group’s African operations for $10.7billion (Narang 1), which is equivalent to SAR 40.1billion. Though the proceeds of this sale will go directly to the Zain group based in Kuwait, one would expect that the group would use the money accrued from the sale to boost Zain KSA’s operations.
Although Zain is yet to confirm anything towards this direction, it is notable that Zain Kuwait considers Zain KSA as one of its most valuable assets in the Middle East (Al Rajhi Capital (a) 1). As such, the Zain group is likely to provide the needed financial loans to help the KSA branch. Should Zain Kuwait go ahead and make this thought a reality, then money advanced to Zain KSA would ease some of the prevailing concerns regarding the firm’s liquidity in Saudi Arabia.
Improved operations
According to (Al Rajhi Capital (b) 1), Zain KSA is performing fairly well as the third mobile operator. Most notably, the firm has been performing well in attaining service subscribers irrespective of the stiff market competition. Moreover, Zain KSA’s sales growth has been on a steady incline, and could therefore translate to reduced losses in the future.
Zain restructuring plan
Although (Al Rajhi Capital (b) 1) observes that there is no definite date when talks about Zain KSA restructuring plan will be complete, there is a chance that the mere talks about the firm’s plan to restructure could improve investor confidence.
If the restructuring plan does indeed take off, there also exist the possibility that investors will look at the firm as a mobile operator which has managed to resolve its financial problems. This could trigger new optimism not only among shareholders, but also among mobile users in the Saudi Arabian telecommunications market.
Recapitalisation
As argued elsewhere in this research paper, a debt-swap and a rights issue are the two most obvious options available to Zain KSA currently. However, (Al Rajhi Capital (b) 2) argues that the two options can still be combined in order to reduce Zain’s net debt to about 25 percent of the firm’s enterprise value.
By February 2010, Zain KSA’s net debt stood at 49 percent of its enterprise value (Al Rajhi Capital (b) 2). While it is agreeable that raising the capital needed to bail the firm out of the overwhelming debt is no easy undertaking, it is also clear that doing so is not entirely impossible. The responsibility to devise viable ways for purposes of raising adequate short-term capital for the firm lays squarely on the management and the contracted advisers.
Renewed optimism in the market
While some people may easily write off Zain KSA due to its financial troubles, others are aware that the gloomy moment will most likely last for a short period before the organisation figures out how to sort its financial woes. One such entity is Erickson, which in February 2010 signed a partnership agreement with Zain KSA for the deployment of a 4G network (Odiabat 1).
As indicated elsewhere in this research paper, Zain KSA cannot afford to take up new technology after STC and Mobily has done so since it risks losing the early adopters of technology innovation. By signing the 4G distribution agreement with Erickson, Zain KSA not only won the confidence of consumers, but also helped renew the market optimism about its capabilities in the future.
Most notably the deployment of a 4G/LTE network as envisaged by the technical team working behind the Zain KSA/Erickson agreement “represents a revolution in the mobile telecom industry around the world” (Odiabat 1). There is a possibility that being a pioneer in the 4G network deployment in the Middle East, Zain KSA will command more optimism from investors, the government as well as the general consumer market.
Literature Review
With Zain KSA being a relatively new firm, there is not much scholarly literature available on the organisation. As such, most of the literature used in this research is in the general news category. To verify the news articles for credibility, this research only relied on authoritative news sources.
The issue regarding Zain KSA’s poor financial performance has been covered extensively in the news media. (ITP Digital Limited; Oxford Business Group 138) are all examples of how this subject has raised concerns in Saudi Arabia and elsewhere.
In the article published by (ITP Digital Limited), one gets a glimpse of what the consumer market thinks about Zain KSA’s financial woes based on comments submitted by readers. One reader for example points out that the Saudi Arabian Kingdom mentality of having wealthy families (who own huge stakes in Saudi-based firms) lead companies is responsible for the financial problems in Zain KSA.
Most dominant in the reader’s comment is the assertion that most families in Saudi Arabia, who have the capital to invest in huge businesses like Zain KSA do not necessarily have professional management capabilities. For that reason, (ITP Digital Limited) points out that Zain KSA could learn a few lessons from Mobily regarding separating family ownership, from the management of the company.
The issue of product differentiation keeps coming up in the reviewed news articles. (ITP Digital Limited) just like (Oxford Business Group 138) argue that Zain KSA needs to find a niche market for its products in the Saudi Market.
To do this, (ITP Digital Limited) suggests that the firm needs to understand the Kingdom’s business dynamics first, and then deliver products that suit specific needs presented in the market. To justify its position as the third mobile operator in KSA, (ITP Digital Limited) suggests that Zain should quit copying what Mobily and STC are already doing, and provide the market with new, innovative and quality services.
In relation to the financial problems facing Zain KSA, different scholars and financial analysts have written numerous news articles citing viable ways through which the firm can resolve its financial issues. (Al Rajhi Capital (a) 1-4; Al Rajhi Capital (b) 1-3; and TradesArabia News Service) are just some of the authors who have investigated the Zain KSA scenario and suggested several solutions.
Regardless of the differences in authorship, the most cited solutions for the firm include a rights issue, a debt swap, or sale of some of Zain KSA’s equity to other firms. Amongst these options, a rights issue appears like the most favoured alternative with (TradesArabia news service 1) confirming Zain KSA’s intentions to use the rights issue to raise SR 4.38billion to fund its growth in the Kingdom.
This confirmation by Zain KSA’s management seems to bring down the earlier estimated value of SAR6.0billion. In a market research analysis conducted by (Al Rajhi Capital (a) 1), it was estimated that Zain KSA would need to raise an overwhelming SAR 6.0billion. This amount would be sufficient to repay some of the outstanding debts stifling Zain’s operations in the Saudi Arabian Market.
The (Oxford Business Group 138) has authored a detailed analysis of the Saudi Arabian market, laying special emphasis on the liberalised state of the sector and the consequent competition among service providers. Most notably, the (Oxford Business Group 138) observes that with the market experiencing increased mobility especially with three mobile phone service providers already in place, the hard part for operators remains acquiring subscribers and retaining them.
In Zain KSA’s case, the main challenge lies in developing products that would appeal to the market in such a way that, subscribers already using the STC and Mobily networks would find it advantageous to drop their current subscriptions and adopt Zain’s. Admittedly, this is no small undertaking especially in an environment where all the three subscribers are looking for means through which they can outdo each other.
As such, the (Oxford Business Group 138) suggests the introduction of unique value-added services by telecom operators in the Saudi market. In this argument, the (Oxford Business Group 138) posits that the unique value added services would not only to differentiate competitors from each other, but would also act as a means of enhancing their respective growths in the market.
While the voice market has been cited as one of the precursors that indicate how well a firm performs in the Saudi Arabian market, the (Oxford Business Group 138-139) argues that the non-voice market is also another area that each operator should focus on.
This is especially vital because in addition to the 3G concession that all three operators have managed to attain and roll out, more advanced technology including the 3G+, LTE and 4G services have already been introduced in the market. Zain KSA has a special advantage over the others considering that it was the first in the market to introduce the 4G/LTE technology in the market (Odibiat).
The 4G/LTE introduction was made in conjunction with Erickson and was initially rolled out in four cities only (Al Khubar, Dammam, Jeddah and Riyadh). The fact that Zain managed to secure this partnership despite both its competitors having stronger network infrastructure as well as better financial performances, is an indication that people and organisations still have some trust in the firm.
Findings and Analysis
This research paper has established that though Zain KSA’s market performance is promising, the firm’s debt stands on its way to winning consumer confidence, and could affect investor confidence in the future.
More to this, there are leadership issues plaguing the company as has been noted by (ITP Digital Limited), with specific regard to the Ali family taking leadership positions in the firm, despite them being ill-equipped to lead a multi-national company like Zain KSA. One can also interpret indications by (Kwintessential) regarding the Saudi Culture, to mean that the societal norms have played a role in the slow customer acquisition that Zain KSA has had to endure.
Indicating that Saudi’s adopt change cautiously, (Kwintessential) notes, “Saudi Arabia is a low risk and low change-tolerant culture, [where] new projects will be carefully analyzed to assure that whatever risk they present is thoroughly understood and addressed”.
This means that for Zain KSA to gain mobile phone users at the expense of STC, they would need to be convinced that the former does not pose any risk to them, and that the firm’s operations are completely secure. The difficulty of attaining this feat is evident in the low effect that both Mobily and Zain KSA are having on STC’s subscription numbers. This is despite the two mobile operators having better technological inventions that STC.
This research has further identified five solutions that Zain KSA can use in order to overcome its challenges in the Saudi Arabian market. The options include: a) a rights issue; b) a debt swap; c) management change; d) seeking financial assistance from Zain Group in Kuwait; and d) adopting a differentiation strategy. Zain KSA can even combine some of the identified solutions in order to come up with a more effective strategy for streamlining its operations in the Kingdom.
Implementing a rights issue
As has been predicted by (Al Rajhi Capital (a) 1), Zain KSA urgently needs to reduce its debt. To succeed however, it would first need to decide on the right strategy to adopt. Suppose the firm choose the rights issue as the best way to go, then it would need to convince the shareholding majority of the applicability of the rights issue in solving the prevailing debt.
As has been noted by (Al Rajhi Capital (a) 1), “staging a rights issue [may] be hard” since existing majority shareholders may become wary of the possibility of a dilution. In case a dilution occurs, majority shareholders who have the biggest stake in the firm may lose their control powers due to the inclusion of other shareholders with decision-making capacity. (Al Rajhi Capital (a) 1) suggests that in order to avoid a dilution, Zain KSA will have to consider staging a “1 for 2 rights issue reserved for minority investors”.
As indicated elsewhere in this research paper, implementing a rights issue will also need Zain KSA to find an effective strategy to push its current share price above the nominal fee of SAR 10.0. By the end of August 2010, the Zain KSA share was trading at SAR 9.00, which was SAR1.00 its IPO price. To make the stock attractive to potential clients in a rights issue, the firm would need to push the share price above the SAR10.0 mark.
Implementing a debt swap
Another of Zain KSA’s options lies in swapping part of the firm’s outstanding debt with its creditors in exchange with equity (Al Rajhi Capital (a) 1). The implementation of a debt swap is however dependent on the shareholders approval of such a move, and the creditor’s willingness to become part of Zain KSA’s shareholders. Because Zain KSA owes Murahaba Bank a whooping SAR9.1billion, (Al Rajhi Capital (a) 1) has identified the latter as one of the creditors that Zain should pursue with the debt swap proposal.
Implementing changes in the management
In international business practice, solutions to problems facing business entities can be solved through managerial decisions. In a scenario like Zain KSA’s, changing the top management could provide “fresh perspectives” needed to provide the firm with new ideas on how to entice the mobile subscribers in the Kingdom. (Odiabat 1) has noted that Zain KSA has hired (and fired) four different marketing managers in the last three years.
The firm concentration on the marketing department was ostensibly done to provide solutions for its below-expectations performance. Seeing that not much improvement has been attained, the firm should turn its attention to other echelons of power in the organisation.
Seeking financial aid from Zain Group based in Kuwait
Should all efforts to raise capital and restructure Zain KSA fail, the firm should seek assistance from Zain Kuwait especially considering that the latter has additional capital attained from the Bharti Airtel-Zain Africa deal. With Zain KSA remaining the single most important Middle East asset for the larger Zain Group, chances are that are that the financial aid would be advanced albeit as a loan (Al Rajhi Capital (a) 1).
Implementing a differentiation strategy
Like other firms operating in a competitive market, Zain KSA needs to find a strategy through which it can differentiate itself from its competitors. For such a strategy to work, the firm will need to conduct a comprehensive study of the telecoms consumer market in Saudi Arabia, and devise products and services that will serve the market well.
As noted by the (Oxford Business Group 138), one of the outstanding challenges that telecoms operators in the Saudi Arabian Kingdom will have to overcome relates with providing unique products and services that appeal to the different consumer preferences as represented in the consumer market. This is especially the case as competition becomes stiffer.
By quarter 1 2010, (Al Rajhi Capital (b) 3) reports that the Saudi Arabia Kingdom had a 140 percent mobile phone penetration rate. Such rates suggest that attaining users who have never subscribed to a mobile phone service before is becoming harder for the three operators. As such, attaining new users will be at each other’s expense. The differentiation strategy by Zain KSA should therefore aim at retaining existing consumers, while bringing in new users from either STC or Mobily.
Possible Future Implications
Zain KSA’s financial struggles could serve a few lessons to the firm as well as other telecom service providers operating or interested in the KSA market in future. For starters, prospective investors in Saudi Arabian telecoms market may have to conduct detailed surveys in the market to determine its viability before bidding to operate in the same. The notion that the market that the market is automatically lucrative has already been dispelled by Zain KSA’s performance and struggles.
Secondly, investors who may have held the notion that borrowing from the domestic market as Zain KSA did is a wise move may have to reconsider such a thought in the future. Even with the Saudi’s policy that foreign investors must collaborate with local Saudis while establishing a business in the kingdom, heavy borrowing pegged on the notion that the Saudi telecoms market is lucrative will possibly not hold in future.
For Zain KSA, the present scenario may act as a wake-up call for the management to re-evaluate the firm’s performance in the market, its strengths, weaknesses and prospects in the future. The management has probably realised that their strategies have failed to attain desirable results, and hence would be more willing to involve expert opinion on how to go about designed and instituting better strategies meant to improve the firm’s financial returns and position in the market.
Conclusion and Recommendations
The overriding problem facing Zain KSA now is the high debt burden. Consequently, the firm’s share price has suffered negatively in the recent past. More to this, the constant media attention drawn to the firm’s inability to meet its debt obligations gives the public as well as investors a negative impression about the firm. Shareholders on the other hand continue experiencing low equity attributed to them because the firm’s share price has gone below the SAR 10.0 mark, which was its IPO price.
Though the Zain KSA still performs well in different measures, its financial woes are clouding the market’s perception about the firm attaining a stronger market position in the future. This then raises the need for the firm to find lasting solutions to its high debt. As has been indicated in this research, a rights issue seems like the most likely solution for the firm. Still, a debt swap can be carried out either independently, or together with the rights issue.
As has been indicated in this research, modest estimations point out that Zain KSA should at least raise SAR60.0billion if it were to meet its outstanding debt obligations. Since neither the rights issue nor the debt swap can independently raise such an amount alone, the firm can consider using the two options together. Getting financial aid from Zain Kuwait is also another viable option, which Zain KSA can consider.
Regardless of the strategy adopted to raise the needed capital, Zain KSA should strive to streamline its operations in order to become more competitive in the Saudi telecoms market. No doubt, this will take some innovation, strategic partnerships, a better understanding of the Saudi telecoms market and, more importantly, good business leadership.
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