A Saudi Arabian state-backed telecom firm is set to splash out $2.5 billion to become the biggest shareholder in Spain’s Telefonica SA, marking the latest instance of Middle Eastern wealth flowing into key European communication assets.
(Bloomberg) — A Saudi Arabian state-backed telecom firm is set to splash out $2.5 billion to become the biggest shareholder in Spain’s Telefonica SA, marking the latest instance of Middle Eastern wealth flowing into key European communication assets.
The move by Saudi Telecom Co. will likely draw scrutiny from the Spanish government, which views Telefonica as a company of strategic importance. If it goes through, that would mean two of the biggest European telecom firms will count state-backed Gulf companies as their top shareholders.
Read More: Spain Will Protect ‘Strategic Autonomy’ in Telefonica Deal
The move comes a year after Abu Dhabi’s Emirates Telecommunications Group emerged as Vodafone Group Plc’s biggest shareholder. The UAE firm has been mandated by the government, its main shareholder, to seek opportunistic deals and this year agreed to pay 2.15 billion euros ($2.3 billion) for a controlling stake in PPF Telecom Group’s service and infrastructure assets in Eastern Europe.
STC and Emirates Telecom are among government-backed firms that Gulf states are increasingly empowering to do deals internationally, in sectors ranging from sports to computer games and mining to healthcare.
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Gulf investors snapping up stakes in European telecom firms is a reflection of their low valuations, said New Street Research analyst James Ratzer. There is a “discrepancy in valuations between public market investors who have got a one to three year time-frame on an investment return, and longer-term shareholders, private capital, who are more willing to take longer-term bets on (an) improving regulatory environment and cash flows improving,” he said.
Saudi Telecom said in a statement that it doesn’t plan to gain control or take on a majority stake in Telefonica. Spain has powers to block stake acquisitions beyond 5% for companies considered strategic for national security and defense, as is the case with Telefonica. Another threshold for further government approval is set at 10%.
“Telefonica is important to Spain,” Ratzer said. “I think the Spanish government would come into bat for them in a way the UK government wouldn’t come into bat for Vodafone.”
STC is the largest telecom operator in Saudi Arabia, a $52 billion giant more than twice the size of Telefonica, and a former monopoly like Emirates Telecom. That’s enabled both Gulf firms to reap huge profits from their domestic markets that they’re now looking to redirect into international expansion.
The Telefonica deal is the Saudi firm’s second foray into Europe this year, after the firm agreed to buy a portfolio of tower assets from United Group for $1.3 billion in April. Its majority shareholder, the PIF, was part of a consortium that bought Vodafone’s towers unit in 2022.
In neighboring Abu Dhabi, sovereign wealth fund Mubadala Investment Co. has invested in UK telecom infrastructure firm CityFibre and bought a stake in EQT AB’s fiber network operator, while Abu Dhabi Investment Authority is discussing joining KKR & Co. on its €23 billion bid for Telecom Italia SpA’s landline network, Bloomberg News reported in July.
–With assistance from Dinesh Nair and Rodrigo Orihuela.
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