By Emma Pinedo and Belén Carreño
MADRID (Reuters) -Spain is analysing Saudi Arabian group STC’s purchase of a 9.9% Telefonica stake, signalling a potential hurdle to the move, in order to ensure its strategic interests are upheld.
STC had contacted the Spanish government on Tuesday to inform it of the deal, which would make STC the Spanish telecom’s largest shareholder, acting economy minister Nadia Calvino said in Brussels on Wednesday.
“Telefonica is a strategic company for our country and as government we will apply all the mechanisms that are necessary to prioritise the defence of our strategic interests,” Calvino told reporters when asked about STC’s move.
Madrid could potentially stymie STC’s stake purchase since Telefonica provides services to Spain’s defence industry and the government can intervene in acquisitions of holdings above 5%.
STC said on Tuesday it had built a 9.9% stake in Telefonica worth 2.1 billion euros ($2.25 billion), following the playbook of other Middle-eastern companies in investing in European and Latin American telecom operators.
STC is Saudi Arabia’s largest telecoms operator and is 64% owned by Saudi Arabia’s Public Investment Fund (PIF), the main engine of Crown Prince Mohammed bin Salman’s Vision 2030 to wean the economy off its dependence on oil.
European telecom firms such as Telefonica have meanwhile been struggling to pay off huge debts in the face of slow-growing mobile business and high investments for latest technologies such as 5G.
They have tried to raise funds by selling off their tower businesses, lobbied the European Commission to allow for market consolidation and have been fighting with technology companies to get then to fund infrastructure investments.
Telefonica’s total debt is close to twice its market value of almost 22 billion euros.
“This provides a much needed boost for Telefonica given the huge investment to rollout fibre broadband 5G in key core markets,” said Paolo Pescatore, an analyst at PP Foresight.
There will now be opportunities for both companies to work more closely to bring greater efficiencies and launch new products globally, he said.
The government introduced legislation to block acquisitions of stakes of 10% or more in listed companies by entities from outside the European Union and European Free Trade Association to try to prevent hostile takeovers of companies whose value had plummeted since the COVID-19 pandemic.
The threshold at which the government can intervene was recently lowered to 5% for companies related to defence.
Calvino said Madrid was analysing the application of the relevant defence mechanisms, the sector, its relation with Spain’s security and defence of Spain, STC’s shareholding, the exercise of voting rights and the participation on the board or other decision-making bodies of the company.
“Fortunately, since we arrived in government we have reinforced the mechanisms for protecting our strategic interests,” Calvino added.
Telefonica is listed as a defence provider on government websites, supplying “systems and equipment” to the army and satellite services to the defence ministry’s aerospace arm.
A Spanish government source also pointed to potential concerns over STC’s relationship with telecommunications giant Huawei Technologies, including a recent Memorandum of Understanding between the two to develop fibre-optic broadband.
Information technology has been a sticking point for China’s relations with the United States and European countries, which have in some cases banned Chinese products for security reasons.
Spain is not among the 10 EU countries that have banned Huawei and ZTE from their 5G telecoms networks, but EU pressure is growing on all member states to do so.
Neither STC nor Telefonica responded to requests for comment about Huawei’s work with STC. Huawei, ZTE and Beijing have rejected Western allegations that Chinese equipment might be used for spying.
Telefonica, whose shares were 2% up on Wednesday on the Madrid stock exchange, said it was informed of STC’s investment on Tuesday, describing it as “friendly”.
STC’s holding consists of 4.9% of Telefonica’s shares and financial instruments that give it another 5% in so-called economic exposure to the company. It said it plans to secure voting rights for that 5% interest held through financial instruments after receiving regulatory approvals.
(Reporting by Inti Landauro, Emma Pinedo and Belen Carreno; Editing by Jason Neely, Jan Harvey, Aislinn Laing and Alexander Smith)