Nov. 15 (Bloomberg) -- Zain, Kuwait’s biggest phone company, said third-quarter profit dropped 53 percent because of currency fluctuations and increased financing costs for its network expansion.

Net income declined to 41.2 million dinars ($144.4 million), or 11 fils a share, from 87.2 million dinars, or 24 fils, a year earlier, Zain said in a statement on the Kuwait Stock Exchange Web site today. Currency changes reduced profit by $130 million, the company said in a separate e-mailed statement.

The decline in profit comes as Kharafi Group, Zain’s second-largest shareholder, prepares a transaction to sell control of the company. Kharafi signed an accord in September to dispose of a 46 percent stake, valued at $13.7 billion, to India’s Vavasi Group and Malaysian billionaire Syed Mokhtar Al- Bukhary.

“The earnings are very weak,” Irfan Ellam, Vice President Telecoms Research at Al Mal Capital PSC, said in a phone interview from Dubai today. “Our thoughts are that capital expenditure has been financed by increased debt.”

Nine-month profit fell 17 percent to 195.7 million dinars, or 51 fils a share. Consolidated revenue rose 24 percent to 1.78 billion dinars, the company said.

‘Significant Impact’

“The global economic crisis, unfavorable foreign currency fluctuations, particularly in many of our African operations coupled with reduced interest income and investment income plus higher financing costs, have had a significant impact on the company’s overall profit,” Chief Executive Officer Saad al- Barrak said in the e-mailed statement.

“Adding to these challenges are the associated ‘start-up’ capital and operational expenditures in two large and promising operations that were launched in the last 12 months, namely Saudi Arabia and Ghana, as well as increased fixed costs charges as a result of network expansion in many of our markets,” the CEO said.

Al-Barrak said Oct. 5 that Zain forecast 30 percent growth in earnings before interest, taxes, depreciation and amortization this year. Zain’s Ebitda rose 37 percent to 757.3 million dinars in the first nine months, the company said today.

“Revenue has grown quarter on quarter,” Ellam said. “Ebitda margins have weakened, indicating that the cost- reduction program doesn’t appear to be working.”

Zain fell 3.9 percent to 1,000 fils in Kuwait today. The stock has advanced 19 percent this year, giving the company a market value of 4.3 billion dinars.

Stake Sale

“Zain’s share price has been driven by news of the stake sale,” Chandresh Bhatt, an analyst at Global Investment House KSCC, said in a phone interview from Kuwait before the figures were released.

On Sept. 16, Kharafi invited smaller holders to sell their shares so it could gather enough stock for a majority stake.

Shareholders participating in the stake sale agreed to sell 46 percent at 2 dinars a share, Kharafi said in September. Two Zain investors filed four lawsuits challenging the possible stake sale, their lawyer said Nov. 2.

Zain halted talks to sell its African operations at the request of potential buyers of the stake, al-Barrak said Oct. 5. Zain had been in talks with three potential buyers, he said.

Vivendi SA, owner of phone companies SFR and Maroc Telecom, said in July it halted talks with Zain about buying a majority stake in the Kuwaiti company’s African phone assets. Zain values the assets at about $10 billion, three people familiar with the plans said in June. Al-Barrak has declined to disclose how much Zain’s African assets are worth.

To contact the reporter on this story: Fiona MacDonald in Kuwait at fmacdonald4@bloomberg.net

Last Updated: November 15, 2009 12:05 EST