The board of Zain approved on Sunday an offer worth a total $5 billion by Kingdom Holding and Bahrain Telecom for the Kuwaiti telco's Saudi assets, sources said.
The acceptance of the fresh offer from Kingdom, owned by Saudi billionaire Prince Alwaleed bin Talal, and Batelco raises the chances of Abu Dhabi's Etisalat completing a separate $12 billion deal to buy a controlling stake in Zain. Zain's Saudi unit must be sold before that deal can go ahead.
Zain's board approved the offer with a vote of five to two, one source familiar with the matter, who declined to be identified, told Reuters.
Saudi Arabia's Kingdom and Bahrain Telecommunications (Batelco) offered to buy the assets at 10 Saudi riyals ($2.67) per share, paying $1.2 billion in total, and agreeing to take over $3.8 billion of debt, another source said.
Kingdom and Batelco, whose bids to buy Zain's Saudi operations were rejected last month, had teamed up on Sunday to make the joint bid for the assets.
Zain must sell its 25-percent stake in Zain Saudi, valued at $750 million, to avoid overlap with Etisalat which also operates in the kingdom through affiliate Mobily.
Zain's board is expected to meet on Sunday to discuss the offer, a source said. The bid expires Monday.
Kingdom's shares closed up 6.9 percent while Zain Saudi soared 9.16 percent and Zain shares ended up 4.41 percent. Etisalat gained 0.88 percent while Batelco was flat.
Etisalat, keen to expand outside its home market after losing its monopoly in 2007, offered to buy a 46-percent stake in Zain in September from major shareholder Kharafi Group, a family-run conglomerate.
The deal has been plagued by delays, including a lawsuit from unhappy Zain shareholders, and Etisalat has twice extended a self-imposed January 15 deadline to finish due diligence. Etisalat reiterated earlier this month it was still interested in the Kuwaiti firm.
"Zain is a good asset and a great strategic fit for Etisalat so I don't think Etisalat will give up easily," said telecoms analyst Irfan Ellam at Al Mal Capital in Dubai.
Last month, a source with knowledge of the bids said the Zain board deemed the Batelco bid as too low while Kingdom did not want to take on Zain Saudi's debts.
A third bidder, a consortium led by Al Riyadh Group, was not considered because it was unclear who was behind the group.
Batelco also holds a 15 percent stake in Saudi Atheeb, a fixed line operator, while Zain Saudi has no fixed line licence.
Zain Saudi, which also competes with Saudi Telecom, has racked up mounting losses since launching services in August 2008 and has an estimated $3.9 billion of debts.
"There are a lot of issues to cover regarding Zain Saudi, such as the shareholder loans and Zain's collateral guarantees," said Simon Simonian, Shuaa Capital telecoms analyst in Dubai.
"(But) Saudi Arabia is the largest and most important country in the Gulf and there's a strategic opportunity to buy into a domestic telecoms operator that may not come again - STC and Mobily are unlikely to come up for sale."
Earlier on Sunday, a Kuwaiti newspaper said Prince Alwaleed is considering buying a controlling stake in Zain for 1.7 dinar ($6.12) per share, the same price offered by Etisalat.