Zain's Large Dividend - Bailout for Cash Strapped Shareholders

Copyright Stahlkocher

GNU Free Documentation License

You've probably heard about Zain's Board's decision to pay out a dividend three times 2009's profits using the cash from the sale of a substantial portion of its African ventures.  Here's The National's account.

“It looks to me like Zain will increasingly be used as a cash-generation machine,” said Irfan Ellam, a vice president of equity research at Al Mal Capital in Dubai.

Mr Ellam said the “highly unusual” payment of a dividend larger than annual profits illustrated that the priorities of the company were shifting from rapid growth to paying returns to shareholders.

And what has prompted this sudden reversal of corporate strategy?  Why is Zain doing this?

A sudden change in the nature of its cash intensive business?  Are capital expenditures no longer a major need in this business?  No.

A sudden change in plans for expansion outside of Kuwait?  A retreat to a Kuwait only strategy ? No.  At least if I've understood correctly.  I though new management's  new strategy was to focus on expansion in the GCC region.   But maybe the plan is to finance regional expansion with high amounts of debt?  This is after all a Kuwaiti company - and national traditions are important.

So what then is the  answer.

Actually it is much much simpler.

In true Kuwaiti style some of Zain's largest shareholders have overextended themselves in "wise" investments.  They now urgently need cash to bail themselves out. The usual source - more  leverage - is not available for a variety of reasons. 

What does one do when one needs cash but one's friendly banker is sitting on his wallet?

Of course, sell an asset.   And generally that means selling the better ones.  Not much market for those assets with great but yet undemonstrated potential.  And no discernible cash inflow.  In fact, it's probably those latter assets which are the source of one's current cashflow problems.

You know those beloved (to Kuwaiti "investors") investments that are long on hockey stick capital appreciation, short on cashflow and which, of course, have been leveraged to the hilt.  "Wise" investments that require cash to unlock those remarkable returns.  And which require cash to service the loans supporting them.

And so real value, tangible value is destroyed in the (as usual) vain hope of creating value in a cloud.  Or in dealing with the torrential financial rain caused by a cloud "burst".