CWC.L Share News (CWC)

* Some aspects of acquisition did not get approval

* Analysts question merits of purchase

* Batelco's profits have fallen in 15 of past 17 quarters

By Matt Smith

DUBAI, Dec 19 (Reuters) - Attempts by Bahrain's Batelco to offset shrinking earnings at home by expandingabroad have run into trouble as parts of its biggest acquisitionhave fallen foul of regulators.

Lacking the firepower of Gulf rivals for multi-billiondollar deals, state-run Bahrain Telecommunications Co. boughtCable & Wireless Communications' (CWC) Islands divisionfor $570 million in April.

But an agreement to acquire the firm's Seychelles operationsfor a further $110 million fell apart early this month after itfailed to win regulatory approval.

Now another part of the deal - this time involving MonacoTelecom - has collapsed.

Instead of being able to exercise an option to buy the wholeof a company that owns 55 percent of Monaco Telecom, Batelco isnow selling back the quarter of that firm which it had boughtfor $100 million. Batelco said the two parties had agreed toreverse the sale because Cable & Wireless did not expect to winthe necessary approvals by next April.

"There is no question of us selling our operator toBahrain," Monaco's government said in a statement dated Dec. 4.

Batelco had hailed the Cable & Wireless deal as key todiversifying from Bahrain - where it faces competition andsporadic instability that has helped drag profit lower for 15out of the past 17 quarters. At a record low, its shares aredown over 18 percent this year.

The company did not respond to an emailed request forcomment on where the collapse of the Seychelles and Monacoaspects of the deal leaves its strategy.

SMALL ISLANDS

"Batelco still faces the core problem of its domestic marketposition continuing to deteriorate," said Matthew Reed,principal analyst at Informa Telecoms and Media in Dubai.

Batelco now appears to have paid $470 million for operationsin the Channel Islands, Isle of Man, Falkland Islands, StHelena, Ascension and Diego Garcia, plus a 52 percent stake inthe Maldives' Dhiraagu.

But profits at most of the small operators acquired with theCable & Wireless purchase have also been falling - a contrastwith Monaco Telecom, whose operating profit rose 12 percent inthe first six months of its accounting year.

The small markets also do little to complement Batelco'sexisting footprint, which includes mobile firms in Yemen andJordan and fixed line operations in Kuwait and Saudi Arabia.

Given what it is now left with, Batelco could have paid lessfor the Cable & Wireless deal, said Shrouk Diab, assistantvice-president for research at NBK Capital in Dubai.

"I doubt there are many synergies for Batelco at anoperational level from this deal," Diab said.

Batelco has recently been hit by the departure of some ofits most senior executives - a factor which cannot make iteasier to court regulators. The company is currently headed by athree-person committee.

Batelco's $1.3 billion market value is dwarfed by the likesof the UAE's Etisalat at $25 billion and Qatar'sOoredoo $12.1 billion. Combined, they have spend thebest part of $9 billion on acquisitions in recent years.

At home, Batelco vies for customers with Kuwait's Zain, Saudi Telecom Co unit Viva Bahrain andabout 10 internet service providers. It also feels the impact ofBahrain's economic and social difficulties.

Protests led by the island kingdom's Shi'ite majority brokeout in early 2011 and discontent has simmered ever since.

"Batelco remains a profitable company, but if you're askingwhere the company can go from here there are few easy or obviousanswers," Reed said. ($1 = 0.3770 Bahraini dinars)