Decision making in corporations is largely influenced by their capital structure as it is from the capital that they have managed to raise that such corporations are able to fund their operations. This capital is in most cases raised from different sources and as such companies seek to source their funds from quarters that will give them the best financing and repayment structures. In doing so, corporations consider issues such as the costs and benefits associated with sourcing funds from different lenders, the trade off between these costs and benefits, the prevailing financial conditions in the corporation as well as the general economy within which they are operating and any challenges that the organization may face while making changes in their capital structure (Parson & Titman 1). The effects of different shocks in the financial sector and the economy are also considered as they normally affect things such as the repayment period, the lending rates and payment interest rates among others.
This paper seeks to analyze Zain Saudi Arabia’s capital structure, the company’s investments in the last three years, the reasons for its geographical expansion, the level of its debts in the recent years and the impact the losses the company has been making has had on these debts and in general the company’s capital structure. In order to do this, it is necessary to fully understand the meaning of capital structure and its various aspects as outlined below.
Capital structure refers to the combination of equity financing and debt that organizations acquire so as to finance the acquisition of its productive assets and operations either in the short term or in the long term (Swanson, Srinidhi & Seetharaman 2; Bierman 1). To come up with a viable capital structure, an organization normally comes up with a certain debt ratio which shows the proportion of its debt as compared to the assets the organization holds. This ratio is calculated as the amount of total debt divided by the amount of total assets. The interpretation from this is that if the ratio is greater than one, the organizations debts are greater than its assets, if less than one, it shown that an organization has more assets compared to its debt and if equal to one, it means that the company’s debts and assets are proportional to each other. This therefore suggests that organizations should seek to have the most viable capital mixture in order for it to be considered as being financially sound. The most favorable capital structure for a company would thus be the one that allows it to maximize its earnings as well as raise the price of its stock/shares.
Zain Saudi Arabia’s Capital Structure
Saudi Arabia’s telecommunications industry is composed of several players offering mobile related services, landline and internet services, namely Mobily and Saudi Telecom. Zain is the most recent entrant into the mobile services providers list, having entered the market in 2008, after acquiring its license in 2007. Among the services it offers to the Kingdom’s people are text and multimedia messaging, data services and call management (Zain (A) para. 1). The company attained a subscriber market share of about seven percent during its first year of operations in the Kingdom and reported a net loss for that financial year as most of the revenues were used to service the operational costs that had been incurred leading up to the launch of the company into the market (Merhl & Nizam 41). Despite this fact, the company’s then Chief Executive Officer, Marwan Al Ahmadi, was confident that it would be able to achieve profitability within a three year target period that had been set. Zain invests heavily in its operations such as network roll outs and strategic partnerships, and with the kind of funding required for such operations, it is important that the company keep an eye out for its capital structure to avoid unwarranted problems.
Zain Saudi Arabia’s equity funding comes from shareholders equity as well as the retained earnings of the company. The company floated its shares in the Saudi Arabian stock exchange market in the 2008 initial public offer (Galal para. 3). In 2008, the company made revenues of about five hundred and eighty one million Saudi Riyals while its operating losses amounted to about 1,700 million Saudi Riyals meaning that it incurred net losses for that financial year. In the first quarter of 2009, the results were no more different as it still reported huge operating losses though not as huge as those reported in the last quarter of 2008. The revenues for the quarter amounted to 656 million Saudi Riyals with the net loss being 756 million Saudi Riyals (Merhl & Nizam 45). This situation was replicated for the rest of the year and as at the end of the 2009 financial year, Zain Saudi Arabia’s capital structure showed that the company’s debts were more than its equity financing, meaning that its debt ratio was more than one. This was attributed to the fact that the company was still servicing its initial investment operational costs that were incurred in the period preceding the launch of its operations in Saudi Arabia, high amortization and depreciation expenses as well as the costs associated with administration of the company.
The year 2010 has seen improvements in the company’s revenues as well as a reduction in the operational cost losses, but the company is still operating at a loss as the operational losses that were incurred before are yet to be offset. In the first quarter of this year, Zain Saudi Arabia saw an eighty eight percent increase in its revenues compared to the same financial period in 2009, which is from five hundred and eighty two million Saudi Riyals to 1.094 billion Saudi Riyals (Zain (D) para. 1). The gross profit for the period was three hundred and eighty four million Riyals compared to the a hundred and forty six million that had been achieved in 2009. The operating losses for the quarter also showed a drop compared to the results of the same period in 2009 representing a thirty four percent drop from six hundred and fifty six million Riyals to four hundred and thirty five million Riyals. According to the Company’s Board of Directors Chairman, this showed Zain Saudi Arabia’s ability to acquire more subscribers in the Kingdom and thereby cutting out its own niche in the highly competitive and saturated telecommunications industry. This was attributed to the company’s ability to create products that are customized to the needs of their customers and potential customers as well as coming up with technologies that ensured their competitive advantage over the other industry players and thereby was on course to achieve its set out strategic objectives. The company’s subscriber base also reported a growth of a hundred and one percent since its launch in 2008. This was reflected in the increase in the volume of calls made by the company’s subscribers to people within and outside the network which was mostly attributed to the reduction of the roaming charges charged by the company. According to the company’s Chief Executive Officer, Saad Al Barrak, the growth in revenues was reflected in the company’s net losses which showed a reduction of about thirteen percent down to six hundred and sixty three million riyals from seven hundred and sixty five million Riyals (Zain (D) para. 4-5).
Zain Saudi Arabia’s Investments between the Years 2008 and 2010
Since its launch in 2008, Zain Saudi Arabia has carried out different investments to enable it offer better services to its customers, attract more customers and improve its market share as well as to help it improve its business performance. Some of these investments have been made at by the company on its own while others have been made in partnership with players in the associated industries such as mobile telephone companies. These investments include the following:
Strategic Partnerships: In order for Zain to better carry out its operations in the country and provide better services for its customers, it has over the years engaged in different strategic partnerships with different companies such as Siemens and Motorola. In January 2008, Zain Saudi Arabia signed a deal with NSN (Nokia Siemens Network) that was supposed to run for three years until 2010 where NSN would provide the company with 3G and 2G mobile network services such as software application services, radio enablement services and network core services, to enable it to provide its individual and corporate customers with communication services of high quality. With the rapid growth of E-business in the Kingdom, it was deemed necessary by the two companies to come up with a partnership that would enable their customers to reliably exchange information and in effect grow their businesses and the Kingdom’s economy at large (Zain (B) para. 3-4). This contract would enable Zain Saudi Arabia to make savings as far as operational costs and capital expenditures are concerned, and at the same time offer its consumers dependable services. With Siemens having reliable networks as a long serving mobile operator, Zain was set to benefit from the partnership.
Al Barrak, Zain Saudi Arabia’s CEO, announced a strategic partnership agreement that was entered into by the company and Dawiyat Telecom, a subsidiary of Saudi Electricity Company, to allow zain to use its fiber optic link which would enable the company link its operations across the kingdom thereby bringing down its rental costs as well as enable the company to avoid cost that are associated with creating its own cable infrastructure. This would improve Zain’s service provision to its customers. This move was aimed at reducing the company’s expenditure and as such increase the revenues collected. Its network coverage of Kingdom’s population would also be increased by about ninety three percent which would enable it to increase its customer base by the end of this year (Zain (D) para 6-7).
Borderless Network: In April of 2008, Zain launched its One Network borderless services to four Middle Eastern countries, namely Amman, Manama, Khartoum and Baghdad. This would enable its subscribers in these countries to communicate under the same network as if they were in the same country. That is cross border charges would be waived for its subscribers meaning that they would be able communicate cheaply as far as calls and text messaging costs were concerned. Other than pricing, the network would simplify mobile operations for Zain’s customers as they would not have to deal with complicated dialing formats to speak to people in the mentioned countries (Zain (B) para. 4-6). This investment would work for Zain as it would attract more customers to subscribe to the company’s network due to the benefits that come with using Zain.
Zain Saudi Arabia also signed a deal with Motorola for the LTE (Long Term Evolution) network in February 2010, which would enable its subscribers to among other things enjoy better broadband and internet services as well as other personalized media services such as radio access and video conferencing (Motorola para. 1-3). This service would work for the benefit of both corporate and individual clients as it would enable them share information in real time with people within and outside the Kingdom. Zain’s ability to invest in innovative technology through partnerships enables it to offer unparalleled services to its subscribers which ensure customers’ loyalty and the attraction of new customers which in turn works for the benefit of the company as it increases its customer base and revenues which in turn have an effect of raising the company’s revenues and profits.
Corporate Social Responsibility: In as much as a company’s operations matter in improving its performance, its contribution to the society goes a long way in selling the company to the people, as it allows organizations to give back or show appreciation to the community within which it operates. A strong company image is itself a selling point to the people, customers and potential customers and as such is a form of an indirect investment. Zain Saudi Arabia took to investing in the community in different ways such as sponsoring university students and different sports teams in the Kingdom. In 2008, the company signed an agreement with KAU (King Abdul Aziz University), which was aimed at encouraging students to participate in different activities that would help enhance their innovation and creativity skills as far as mobile telecommunication networking is concerned. Zain would support the research and development that would help such students come up with innovative ideas that would help build the company as well as the telecommunications industry as a whole.
Zain also signed an agreement that would make it the certified sponsor of Saudi Arabia’s national football teams which are four in number. The fact that Zain would be guaranteed of all the rights accorded to official sports sponsors would enable them to take advantage of all the advertising rights associated with such sponsorship and sell the company as a brand. With the company engaging in such corporate social responsibility programs, it would be able to acquire people’s trust and as such be able to attract more customers to subscribe to its network.
Technology: Being an operator in an industry largely influenced by information technology, it is imperative that Zain continues to invest in the most updated of technology for it to be able to compete with major players in the telecommunications industry. Among Zain’s investment in technology was the launch of the I-HSPA technology that would enable its customers to access internets services through their mobile phones as well as broadband services for interested subscribers. This investment was a first of its kind in the Middle Eastern region as well as the North African region and would ensure the company’s subscribers to access fast and efficient internet connections that would translate to cheaper internet access costs for them. Since the services were available for mobile phone users it would be convenient for them as they would be able to access the internet from wherever they are. For the company, this kind of technological development would help it attract more subscribers to its network. The company also launched E 180 which is an internet key modem which would enable high speed data transfer to customers subscribing to different packages as rolled out by the company. Such technological advancements enables Zain Saudi Arabia’s subscribers to enjoy computer and mobile phone internet services in an interconnected manner, for example by enabling them to reload their airtime from their computers without having to use their phones.
Impact of the Company’s Investments on its Debts
Even though the above mentioned investments, as well as others are necessary for the company to succeed in the Kingdom’s telecommunications industry, they have huge financial implications for the company and as such its capital structure. This is because the company continues to source funds from different quarters to finance the investments. When a company posts considerable debts compared to its finances, the effects are mostly reflected on the behaviors of its creditors as well as that of its stock holders as it raises the rate of interest at which the debts will be financed, decreases the earnings per share, meaning that the returns on the initial investment made by the company will go down, and also the price of the company’s stock goes down.
In August 2009, the company closed a Murahaba financing deal that would see it being given two and a half million US Dollars. The funds were to be used to repay an existing loan Murabaha loan as well as fund its expansion plans that were already underway as well as future expansions so as to allow for growth in the company’s operations (Zain (C) para 1). The deal saw the participation of eight financial institutions, both regional and international. To the company, this portrayed it in good light to other creditors as it showed international financiers confidence in its expansion plans as well as its operations especially at a time when it was experiencing liquidity shortages due mostly attributed to the effects of the global recession that was being experienced at the time. This funding was an addition to funds it had previously received from the regional and international banking sector. This additional funding had negative implications for the company’s finances as it continued to raise its debt portfolio which had negative implications on its capital structure.
In addition to this loan, the company borrowed loans from other financiers and in February 2010 Zain Saudi Arabia decided to convert the accumulated debts totaling to five hundred and fifty seven million US Dollars to equity by the end of this year. This would enable it to leverage a 50:50 debt and equity financing mix and enable the company to operate without further loan advances (Arqala para. 1).
Arqala in his analysis of Zain Saudi Arabia’s balance sheet, income statement and cash flow statement came to the conclusion that the company was not out of the woods yet as far as financial matters were concerned as its assets were not sufficient to cover the debts that were already accumulated and that profitability was at this point would not be achieved in the near future as this would mean that the company would have to first service all its debts and pay off its operational costs including its license fee that was yet to be fully serviced. He also came to the conclusion that even though at present the company was still being offered loans by banks and shareholders, this situation was temporary unless it started making profits to ensure their continued confidence in its investments and other operations. He suggested that in order for Zain Saudi Arabia to come out of this situation, the number of its subscribers would have to increase so that its revenues can be pushed up. Though this is going to be tough for the company to do as a new entrant, Bravo, was planning to come into the industry and at the same time, the other major players, that is Mobily and Saudi Telecom, still controlled more than eighty percent of the Kingdoms telecommunications customers’ market share.
Despite the obvious financial difficulties that Zain Saudi Arabia is experiencing, the company’s Chief Executive Officer still maintains that the company is not experiencing major financial pressure as far as its financial status is concerned. In a statement he released in April 2010, the CEO was still confident that Zain Saudi Arabia was on the right track as far as its continued investments were concerned and was even thinking of increasing its capital base (Shamseddine para. 1).
The company missed to meet some of its financial obligations to its creditors and was in talks with some of them so that it may be allowed to increase its loan repayment period. The company made a net loss of about a hundred and seventy six million dollars in the first quarter of 2010. A look at the company’s financial statements showed that its liabilities exceeded its assets but this is not a favorable capital structure for any company expecting to meet its obligations to existing creditors. The company’s talks with existing creditors bore fruit to some extent as it was allowed to more time to pay its debts but subject to a number of conditions, one of them being to hand over to them its financial plans for the year (Arnold para. 1-2).
The reasoning behind Zain’s geographical expansion especially into other Middle Eastern countries is that new markets create new opportunities for the company to expand its growth and also give it a chance to reap the benefits that come from investing in new markets. The fact that the company would be able to access what seemed as cheap financing at the time due to low borrowing rates also contributed to the decision to invest in the country. Saudi Arabia’s telecommunications industry offered the right business environment for the company due to the rising demand for data services and the company sought to take advantage of this fact. The company’s assessment of the market at the time showed potential for the company to enter into the market as it was thought by offering low competitive prices for the Kingdom’s population, the company would be able to acquire a reasonable market niche that would enable it to sustain its operations over the long term. Its projections showed that it would be able to break even in a span of three years but the financial problems it encountered during its starting years of operation coupled with the effects of the global financial crisis ended up being a major setback to the company’s operations.
Zain has also been experiencing reduced growth and subscribers’ market shares in its other major operating countries and thus this necessitated the need for geographical expansion. According to Karam (para. 18-19), Zain’s move to pay a staggering 6.1 billion US Dollars for the Saudi Arabian telecommunications mobile operating license came as a shock to many as the market in which they were seeking to operate in was already saturated by the operations of Mobily and Saudi Telecom but Zain Saudi Arabia argued that based on its already existing global presence, it would be able to appeal to Saudi Arabia’s mobile services users and as such be able to fulfill its quest for geographical expansion.
Zain Saudi Arabia’s Stock Prices and Debt Renewal
As would be expected of any company experiencing financial problems, Zain Saudi Arabia’s stock is trading at an all time low price and as such many investors are shying away from investing in the shares of then company. Trading of these shares has also been low and as such the prices have been experiencing a below one percent fluctuation rate for the better part of the month, mostly lying around 8.70 Riyals (Arab Capital Markets Resource Centre). In order for such prices to start rising, the company will need to restore its investors confidence and a good start would be cutting down its debt and meeting its financial obligations to its creditors.
Zain Saudi Arabia opted to renew its debts with different creditors based on its projections that it will be able to achieve positive growth by the end of this year and as such be able to fulfill its obligations to them. This positive growth is projected as the company expects its number of subscribers to have grown compared to how they were at the end of the 2009 financial year. This will translate into increased revenue for the company.
A company’s capital structure plays a major role in decision making as far as decision making is concerned as it is based on the equity and debt mix that a company can be able to determine the level of investments to take as well as the kind of funding that is necessary as well as the repayment structures the company has to bargain for.
Zain Saudi Arabia’s capital structure is not favorable at the moment as its assets debts are more than its equity financing and its liabilities greater than its assets. The company therefore needs s to come up with viable strategic decisions that will enable it come out of its current financial problems and restore investor confidence so that it may be able to source more funds to run its operations. The company also needs to come up with strategies that will ensure its subscriber market share in Saudi Arabia goes up as it is only when this happens that it will be able to earn more revenues to offset the persistent net loss and set it on its course to attaining profits.
Stock prices at Zain Saudi Arabia have also been affected by the company’s current financial position and most would be investors are being advices to withhold from investing in the stock until the financial position of the company improves and as such it is imperative for Zain Saudi Arabia to ensure that this happens. The fact that a new mobile phone service provider is set to enter the telecommunications industry in Saudi Arabia will pose great challenges form Zain as it is yet to stabilize itself in the market and as such it should come up with necessary measures to ensure that when the new player comes into the market, its position in the market will not be worsened. Customer satisfaction is key in enabling companies to create customer loyalty and as such Zain should ensure that its customers are provided with high quality services that will ensure they remain loyal even after the new entrant comes into the market.
Despite all these problems at Zain Saudi Arabia, there is still room for the company to recover and as such it should invest in and engage itself in viable recovery strategies.
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