UPDATE 1-Saudi Telecom to buy Oger stake for $2.6 bln

(Updates with background, quotes)

By Inal Ersan and Souhail Karam

DUBAI/RIYADH Jan 20 (Reuters) - Saudi Telecom Co 7010.SE, the largest Arab telecom firm by market value, said on Sunday it had agreed a $2.6 billion deal to buy 35 percent of Oger Telecom, gaining access to markets from Turkey to South Africa.

Oger, controlled by the family of late Lebanese prime minister Rafik al-Hariri, was in talks to sell a stake to French telecom group Vivendi (VIV.PA) after scrapping a public share sale. The talks ended without a deal, Vivendi said in November.

Gulf Arab telecom operators are expanding out of their home markets, where most have been riding a wave of economic growth spurred by a five-fold increase in oil prices since 2002.

Saudi Telecom lagged its regional rivals, making its first foreign acquisition only last year, when it bought 25 percent of Malaysia's Maxis in a $3 billion deal that gave it access to India and Indonesia, the world's second and fourth most populous countries.

"It was a natural step after the deal with Maxis, which opened the door to large Asian markets with big Muslim communities," Saudi Telecom board member Abdul-Rahman Mazi told Reuters.

"Oger Telecom is present in two of the largest markets in Middle East and Africa," he said of Oger's operations in Turkey and South Africa.

Oger Telecom operates in the two countries and Saudi Arabia, Lebanon and Jordan, providing fixed-line, mobile and internet services. Its parent, Saudi Oger, is a construction company controlled by Hariri's family.

PROFITABLE

Saudi Telecom secured a 26 percent stake in Kuwait's third mobile phone company with a $908 million bid in November in its second foreign venture.

The Kuwait business has yet to start operations, while Mazi said the Maxis networks in Indonesia and India were yet to make money.

"They are still making losses but the potential is tremendous," he said.

"Oger Telecom's business in Turkey and South Africa is very profitable."

Saudi Oger has been looking to sell shares in its telecom business for more than a year.

Dubai-based Oger Telecom announced a $1.25 billion initial public offering in 2006 but cancelled it at the eleventh hour on fears that tumbling Gulf Arab markets would hit the share price after listing in Dubai and London.

Vivendi said in September it was in talks with Saudi Oger about possibly buying a stake in Oger Telecom. Sources told Reuters in Paris the initial stake would be about 33 percent.

Saudi Telecom, controlled by the government of the world's biggest oil exporter, was the last one of the five largest Gulf Arab telecom operators to start making foreign acquisitions.

Saudi Telecom lost its mobile phone monopoly in 2005 to Etihad Etisalat 7020.SE (Mobily), which had seized 40 percent market share by the end of 2007 from 30 percent a year earlier. Mobily is an affiliate of Emirates Telecommunications Corp ETEL.AD.

A third operator, affiliated with Kuwait's Mobile Telecommunications Co (ZAIN.KW) (Zain), plans to start a network this year and Mobily says the kingdom already has more mobile phone connections than people.

Groups headed by Bahrain Telecommunications Co. BTEL.BH, Hong Kong's PCCW (0008.HK) and Verizon Communications (VZ.N) of the United States have initial approval to operate fixed-line phone networks in Saudi Arabia. (Editing by Dayan Candappa)