On Monday, Saudi Telecom Company (STC, A1 stable) announced that it will offer shareholders 1 dinar ($3.30) per share to buy the 74% of VIVA Kuwait (unrated) that it does not already own.
The acquisition is credit positive for STC because the company will benefit from greater dividend flows from an increasingly cash-flow-generative VIVA in the high average revenue per user (ARPU) Kuwaiti mobile sector.
Majority ownership of VIVA would allow STC to make quick unilateral decisions to capitalize on a resilient dollarized growth market.
We see limited risk to STC pursuing this transaction given that its annual EBITDA generation exceeds its total debt, giving it the capacity to comfortably fund the acquisition.
STC has agreed to acquire the Kuwaiti government’s indirect 24% stake at the same price per share as offered to the remaining 50% equity holders. If the tender offer is fully subscribed, it would lead to a cash outlay for STC in excess of $1.2 billion (SR4.6 billion).
STC intends to fund this outflow from available cash resources totaling in excess of $5.90 billion (SR22.1 billion).
VIVA is Kuwait’s (Aa2 stable) second-largest mobile operator with a 31% market share. With 2.41 million subscribers as of Sept. 30, VIVA has one of the highest ARPUs in the Gulf Cooperation Council, which includes Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Bahrain and Oman, and the highest ARPU of STC’s operations.
VIVA’s revenues have grown at an annual average rate of 40% since 2010, with subscribers increasing to 2.41 million as of the end September 2015 from 830,000 in 2010. We expect further growth through higher mobile data usage and an increasing working-age population.
With complete control of VIVA, STC will further strengthen its influence on long-term strategic and financial policies and will gain from more efficient long-term decision-making despite currently having control over the board of directors and day-to-day management.
The acquisition is also perfectly timed to take advantage of VIVA entering a phase of lower capital spending, freeing up cash for greater dividend payments to STC.
The tender offer has the Kuwait Capital Markets Authority’s approval and shareholders now have from Dec. 27 to Jan. 31 to either approve or decline the offer.
Under Kuwaiti laws, minority shareholders cannot be forced to accept an offer even if a there is a majority acceptance. STC cannot revise its offer price before the end of the 30-day period has elapsed. — SG/Moody’s Investor’s Service
