A group of eight banks has raised US$2.35bn for the Etisalat consortium that recently won a licence to operate Saudi Arabia’s second mobile phone network.
BNP Paribas, financial adviser to the consortium led by Emirates Telecommunications Corp, awarded the syndicated loan to Citigroup, and seven regional banks. Bankers say the deal is the region’s largest ever corporate loan.

The one-year loan – bridge financing that will be replaced by a permanent deal next year – will be structured on an Islamic basis, which skirts the Koranic ban on interest. As well as the region’s largest corporate loan, it’s also the biggest Islamic financing deal, bankers and analysts say.

“The client wanted an Islamic loan, so even though the bidders had the option to mix Islamic and conventional finance, they [the eight banks] chose to go fully Islamic,” says one banker involved.

The regional banks are Samba Financial Group, Al Rajhi Banking & Investment, National Commercial Bank, Kuwait Finance House, Abu Dhabi Islamic Bank, Emirates Bank International and Bank Aljazira.

The Saudi cabinet awarded the Saudi-UAE consortium a 25-year licence for the oil-rich kingdom’s second global system for mobile communications (GSM) licence and a 3G network. The UAE state-owned telecoms company placed the highest bid of US$3.46bn to the Saudi telecoms regulator in mid July.

Six Saudi investors will hold 65% of the equity in the new company, with operator Etisalat holding the remaining 35%.

Etisalat will use the money to cover capital expenditure and the hefty licence costs.

The consortium plans to invest US$1bn in its first year. It will offer 20% of the new company’s shares on the Saudi stock exchange one month after the company comes into being with the passing of a royal decree, expected soon. Etisalat will float a further 20% within two years.

Operations are expected to start early next year, with the network covering 11 Saudi cities by the second half of 2005.

The Etisalat consortium is targeting a subscriber base of 7mn out of a country of 24mn residents in the next five years.

During that period it plans to invest US$5.3bn, providing cell coverage across the vast kingdom, including huge tracts of desert where, for now, only satellite phones work.

Analysts say the Saudi GSM market – with a penetration rate of 35% – is a lucrative one. With 8mn cellphone users, the growth rate in usage is around 30%.

Etisalat, 60% owned by the UAE government, in April lost its telecoms monopoly in the UAE. Facing the prospect of future competition, Etisalat turned its eyes to the Saudi market as a growth opportunity.

“This is the biggest telecoms deal in the region – nothing can compete with it – so the financing is of the same scale,” says Walid Shihabi of Shuaa Capital, a Dubai-based investment bank. “It’s a great opportunity for cashed-up regional banks to prosper from the licence.”

The Amman-based Arab Advisors Group has predicted that the GSM market will balloon to US$7.9bn by 2007. In 2002, the market was US$3.4bn.

The second GSM licence is the culmination of a careful reform process in Saudi Arabia’s telecoms sector, by far the largest among the Arab Gulf states.

The government floated 30% of Saudi Telecommunications on Riyadh’s stock exchange at the end of 2002, after the monopoly was privatised in the late 1990s. Saudi Telecom will retain its landline and internet monopoly until 2008.