Industry Trend Analysis - Digital Services Motivates Omantel's Zain Investment - OCT 2017

BMI View : Omantel ' s investment in Zain will deliver improved profitability in return for relatively low risk. Both companies are keen to grow their digital services business and their respective skills and assets are highly complementary. A full take-over seems unlikely as it would not serve Omantel ' s core interests.

Omantel has agreed to acquire a 9.84% stake in Kuwait-based Zain Group in a USD846mn deal aimed at increasing Omantel's exposure to the Middle East and North African digital services market. The companies will cooperate in the fields of wholesale services, operations and infrastructure, commercial activities and knowledge-sharing. Of particular interest to Omantel will be Zain's assets in the digital services arena, especially its nascent smart city unit, neXgen, as it strives to become a key provider of 'Industry 4.0' services in the region.

neXgen is tasked with delivering smart city solutions and managed services for governments and private sector infrastructure developers and its focus so far has been on designing and integrating applications for smart living, smart safety and security, smart education and health, as well as smart metering. Zain's eight-market footprint covers 46.1mn predominantly mobile customers and the investment will therefore expose Omantel to a huge monetisable market for advanced services over the next 10 years.

Zain Investment Footprint, Q117
Country & Ownership Key Data
Note: Omits 15.5% investment stake in Inwi Morocco. Source: Zain
Bahrain (55%) Subscribers: 0.8mnRevenues: USD50mn
Iraq (76%) Subscribers: 12.3mnRevenues: USD253mn
Jordan (96.5%) Subscribers: 4.3mnRevenues: USD119mn
Kuwait (100%) Subscribers: 2.8mnRevenues: USD261mn
Lebanon (management contract) Subscribers: 2.3mnRevenues: na
Saudi Arabia (37.1%) Subscribers: 10.1mnRevenues: USD530mn
South Sudan (100%) Subscribers: 0.6mnRevenues: na
Sudan (100%) Subscribers: 13.0mnRevenues: USD107mn

Non-messaging data services accounted for 46% of Zain's revenues in Kuwait, 51% of revenues in Saudi Arabia and 43% of revenues in Bahrain in Q117, and quarterly and annualised growth of such revenue has been very strong over the last two years. However, a degree of revenue fatigue is reported to have become apparent in Q217 results, suggesting that Zain would benefit from access to greater data monetisation know-how as well as Omantel's experience in commercialising wireline and fixed wireless broadband solutions, of the kind that would sit best within the smart home ecosystem. For example Zain is working with Ericsson to commercialise a complex smart metering system for the Ministry of Electricity and Water in Kuwait and is scoping out similar opportunities in other parts of its footprint.

Having recently disposed of its sole international investment, Pakistan-based ISP WorldCall, the investment in Zain represents a change of tack for the Omani incumbent, which now looks to expand in a more sustainable fashion by focusing on borderless services rather than market-specific providers. It needs to move quickly if this strategy is successful. Increased domestic competition has seen revenues flatten and profits decline, a situation that will be exacerbated by the licensing of a third mobile operator later in 2017. Zain has expressed interest in that licence; Omantel's investment should not be significant enough to prevent Zain from bidding and winning, but it would pose some complex questions regarding conflict of interest that the Omani government should be careful to avoid. Meanwhile, Ooredoo and TeO are putting an increased emphasis on wireline services, undermining Omantel's efforts to improve profitability.

At this stage, we do not envisage Omantel moving to acquire a majority stake in Zain as the latter's large debt and exposure to volatile markets such as Iraq and South Sudan would likely be seen as too risky for this traditionally conservative and cautious operator. We believe Omantel views the minority investment model as a less risky means to facilitate sustainable profit growth.