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UPDATE 4-UAE's Etisalat bids for stake in Kuwait telco Zain

* Etisalat says has made preliminary conditional offer

* Deal puts in question fate of Etisalat’s Saudi ops

* CNBC Arabiya says Etisalat to offer 1.7 dinars a share

* Zain management says has received no official offer

(Adds source says offer made to Kharafi Group, paragraph 6)

By Tamara Walid and Diana Elias

DUBAI/KUWAIT, Sept 29 (Reuters) - UAE's Emirates Telecommunications Corp ETEL.AD (Etisalat) offered to buy a stake in Kuwaiti telco Zain ZAIN.KW, potentially propelling Etisalat into high-growth markets in the Middle East.

“Etisalat has submitted a preliminary conditional offer to buy a stake in Zain,” Etisalat spokesman Ahmed bin Ali told Reuters on Wednesday. He gave no further details.

Analysts, however, said the deal could face regulatory hurdles in key markets such as Saudi Arabia, where both Zain and Etisalat compete for market share.

“There is a sensitive point, which is Mobily in Saudi belongs to Etisalat, and Zain Saudi belongs to Zain. I don’t know how Saudi’s telecom authority will accept this -- one owner for two operators,” Naser al-Nafisi, general manager of Al Joman Center for Economic Consultancy in Kuwait, told Reuters.

In Saudi Arabia, Etisalat is the largest shareholder in Etihad Etisalat 7020.SE (Mobily), which competes with former state-controlled monopoly Saudi Telecom (STC) and with Zain Saudi Arabia 7030.SE.

A source close to the deal said Etisalat offered major shareholder the Kharafi Group 1.7 dinars ($5.97) per share for its stake. “The offer was made to the Kharafis,” he said.

Earlier, CNBC Arabiya TV channel reported that Etisalat had made the 1.7 dinars per share offer for a 46 percent stake in Zain, which would come to just under $12 billion.

“The initial reaction of some investors is that 1.7 (dinars) is a bit on the expensive side, but I am sure Etisalat have made their calculations and realised they will be gaining some,” said Mohammed Ali Yasin, chief investment officer at CAPM Investments in Abu Dhabi.

Zain, the Gulf Arab region’s third-biggest telecoms firm, said its management had not received an official offer.

Another news channel, Al Arabiya, said National Bank of Kuwait NBKK.KW was an adviser to Etisalat, and BNP Paribas BNPP.PA was advising the Kharafi Group.

Kuwaiti family conglomerate Kharafi owns a 12.7 percent stake in Zain through one of its units, according to bourse data, but analysts estimate Kharafi’s stake to be around 20 percent through other firms it controls. The Kuwaiti government owns 24.6 percent in the company.

The group has been attempting to sell its stake in the operator for over a year to raise liquidity.

“They have strong incentive to sell, and I believe this is a very attractive price,” said Nafisi, adding that the stake would be auctioned according to Kuwait bourse regulations, and he doubted any investor would pay more.

BAD NEWS FOR MINORITIES?

The deal could be bad news for Zain’s minority shareholders if they lose influence to a controlling shareholder.

“Forty-six percent is a control share because the Kuwaiti government that owns 24 percent is silent by nature, and the rest of the owners are fragmented,” said Nafisi.

“Kuwait doesn’t have M&A regulations in place to protect the rights of minority shareholders,” said Shakeel Sarwar, head of asset management at Securities & Investment Co (SICO) in Bahrain. “If they do (sell), then Zain’s share price could collapse after the deal.”

Zain shares closed up 7.9 percent at a four-month high of 1.36 dinars on the Kuwait bourse.

Etisalat, which operates in 18 countries including Egypt and India, but derives 85 percent of its income from domestic operations in the United Arab Emirates, is among Gulf telcos looking to expand overseas after losing their monopoly at home.

Its chairman expressed an interest in a 26-percent stake in India's Reliance Communications RLCM.BO earlier this year. [ID:nLDE6860BQ]

The company has made acquisitions from Nigeria to Indonesia, but its only Gulf operation outside its home country is the mature Saudi Arabian market.

“If the deal goes through, Etisalat will have exposure to high-growth markets such as Iraq and Lebanon, which has in the past been of strong interest,” said Shardul Shrimani, telecoms analyst at IHS Global Insight, adding it would also gain access to more stable markets in Bahrain, Kuwait and Jordan.

Zain offloaded its African assets earlier this year in a $9 billion deal with India's Bharti Airtel BRTI.BO, with most of the proceeds distributed to shareholders.

Some Kuwait investment houses and merchant families, including Zain shareholder Kharafi, have been badly hit by the financial crisis and keen to offload assets.

Etisalat's shares were up 0.9 percent, slightly outperforming Abu Dhabi's bourse .ADI. (Additional reporting by Eman Goma in Kuwait and Matt Smith and Amran Abocar in Dubai; Editing by Will Waterman) ($1=0.2850 Kuwaiti dinar)

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