Saudi support to Zain Telecom signifies GCC co-operation

Saudi Arabia’s decision to provide support for Zain Saudi, which is controlled by Kuwait’s Zain Group, suggests that Gulf countries are increasingly willing to cooperate to support the telecoms sector, Fitch Ratings says. In the short term this will help limit the potential for defaults among troubled companies, while in the longer term it may result in governments pushing for cross-border mergers between sub-scale operators.

“We believe most Gulf markets can only support two strong mobile telecom operators in the long term due to their demographics and relatively small size, but many, including Saudi Arabia, Jordan and Bahrain, have more than this. Growth is slowing in these markets, causing third- and fourth-place operators to struggle, especially those that paid high fees for their operating licences. These regions will also reach saturation relatively quickly, which will add to the pressure on all operators,” Fitch in a statement said.

However, it added, we do not believe any Gulf government will want to allow a high-profile mobile operator to collapse, especially as authorities across the region are keen to improve infrastructure. In the short term this may lead to more inter-regional cooperation, similar to Saudi Arabia’s decision regarding Zain Group. But in the longer term governments may prefer to push for consolidation, rather than provide ongoing support for three or four operators in markets that can only realistically accommodate two.

Reports that Dubai and Abu Dhabi are planning to merge their state aluminium producers Dubai Aluminium and Emirates Aluminium further support our view that Gulf governments could be willing to push corporate consolidation, including in the telecom sector, if it would create stronger, more competitive regional entities.

Saudi Arabia’s support for Zain Saudi involves rescheduling the payment of annual fees over the next seven years, which will instead be treated as commercial loans. The deal will help relieve liquidity pressures, as the company faces an upcoming refinancing wall.

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