Note: As of October 2011, Kingdom Holding Company and Batelco have exited this deal. This is an update to the below article written in early 2011 shortly after their bid was submitted.
Last week, Prince Waleed, whom Forbes labelled the “Prince of deals”, lived up to his name and made a $950M bid (in partnership with Bahraini Batelco) for Zain’s Saudi mobile business. It was the culmination of an over six year effort to break into the Saudi telecommunications business.
The joint bid, which has been preliminarily accepted by the Zain Board, will secure 25% of Zain Saudi which is one of the three Saudi mobile service companies. His purchase of these Saudi assets will enable Kuwaiti Zain to now be purchased by UAE Etisalat (which holds the 2nd Saudi mobile licence).
For those not used to emerging markets’ value investing, this is a deal straight from the “Waleed playbook” and is worth studying. We have seen him do this same deal many, many times. Mainly because it really works.
A bit of background. This was Waleed’s third attempt at acquiring a Saudi Arabian mobile business. He bid in the auctions for both the 2nd and 3rd Saudi mobile licenses in 2004 and 2007 respectively. And not only did he not win either auction, he was among lowest bids in both cases. For the third licence, his bid was less than half of MTC’s (Zain’s) winning bid of $6.1b.
This is not surprising, nor is it a criticism. Public auctions in the Middle East attract too much capital and value-based investors, such as Waleed, bid based on what a company is actually worth.
Saudi mobile companies are classic value investing targets. There are only three mobile licenses so there is politically limited competition. And once the network is built, there is a fairly low cost of growth. It fits Buffett’s classic picture of a company with a sustainable competitive advantage and a low cost of per shareholder economic growth.
Waleed, like Buffett, is a value investor that would target such companies. But his strike-zone is not in mispriced public equities but in negotiated private transactions. And it is not in the more transparent Western markets but in the murkier emerging markets that he really excels. It is in these situations that he can bring to bear all his resources and advantages and dramatically limit the number of competing bids. That’s how you get a great company at at discount.
In his bid with Batelco, he is effectively deploying four advantages.
- The first is political access, which he has in abundance. The deal is being closely watched by the Saudi Arabian, UAE and Kuwaiti governments. Not only does it need the approval of the Saudi regulatory authorities but Batelco, Zain and Etisalat all have government owners. Within this highly political situation, Waleed has a strong advantage.
- Second, he is deploying his reputation. If you are selling in distress in the US, Buffett is your buyer of choice. But reputation can have an outsized impact in emerging markets. As the rule of law and regulatory clarity decrease (say in the Middle East or China), the power of reputation increases. You rely on your partner when contracts can’t protect you.
- Third, good management isn’t that common in Saudi Arabia. In many markets, such as Africa and the Middle East, effective management can be a rare quantity and a surprisingly sustainable advantage. The migration of management ability around the world is one of the most important trends for value investors operating globally watch. Zain Saudi has suffered significant losses so Waleed’s history of successful Saudi turn-arounds is important.
- Fourth, he is deploying technical capabilities. In this case, mobile service operating ability which he has captured through a partnership with Batelco. This move also eliminated Batelco as a competing bidder.
This combination of political access, reputable capital, management and telco capabilities eliminates most all the competition for the deal. And that’s how you get a low price. There is only one other rumoured bidder for the Zain deal. This is a fairly stark contrast to the 10 bidders in the mobile auction just three years ago.
For those who follow developing economy value investing strategies (see my book), this is the use of four “value keys” (advantages that open the door to investments and add value) to acquire a “potentially great” company (it’s not great yet but will be quickly) at a discount.
If Buffett usually buys “already great” companies with mispriced value, Waleed usually buys “potentially great” companies through advantaged deal making. This is why he is also referred to as the “Prince of fallen angels”. But it’s value investing. He’s both capturing mispriced value and adding value (effectively expanding the margin of safety).
Waleed has a +20 year history of this same Zain approach, dating back from his distressed acquisition of United Saudi Commercial Bank in 1988. In that deal, he bought a struggling bank that held one of the nine Saudi bank licenses – a “potentially great” asset – and then rapidly improved it. He performed a quick turn-around and merged it with Saudi Cairo Bank in 1996. He then merged it again with Saudi American in 1999. The end result being Samba Financial, one of Saudi’s top 3 banks (and the kind of great company Buffett would try to buy shares of at a discount).
If the Zain bid gets final approval, watch for Waleed to quickly try to turn Zain Saudi into a truly great company. He will focus on improving operating and financial performance rapidly. He will likely explore mergers. He will also look for opportunities to expand his ownership at a discount. If history is any guide, he could end up with one of the top MENA mobile companies in the not too distant future.
His statements this week seem to confirm this:
“Our investment in Zain Saudi Arabia is a strategic investment decision by KHC to enter the telecommunications sector in a large and promising market such as Saudi Arabia, making this deal our initial entry for future expansion in the telecommunications sector regionally,” he said in a statement.