Telefonica Rises After Saudi Telecom Buys $2.25 Billion Stake

Telefonica SA’s shares rose after Saudi Telecom Co. took a stake worth $2.25 billion in the Madrid-based carrier as it prepares to lay out a new strategy for future growth.

(Bloomberg) — Telefonica SA’s shares rose after Saudi Telecom Co. took a stake worth $2.25 billion in the Madrid-based carrier as it prepares to lay out a new strategy for future growth.

The Saudi government-controlled telecom operator purchased about 569.3 million shares and is using financial instruments that will altogether hand it a 9.9% interest in Telefonica once approved by regulators, according to a filing posted late Tuesday. The transaction was funded with a combination of the company’s own resources and bank debt. Telefonica’s shares rose as much as 3.7% in Madrid on Wednesday.

The acquisition will draw scrutiny from the Spanish government, which views Telefonica as a company of strategic importance, operating infrastructure that is critical to the nation’s defenses and security. Stake acquisitions of more than 5% may require approval from the the country’s cabinet. The carrier has long counted two Spanish banks, CaixaBank SA and Banco Bilbao Vizcaya Argentaria SA, as its anchor investors, and they altogether own less than 10% of the company.

Saudi Telecom said in a statement that it doesn’t plan to gain control or take on a majority stake in Telefonica. “We see this as a compelling investment opportunity to use our strong balance sheet whilst maintaining our dividend policy,” it said.

The approach by STC was “friendly” and the buyer is supportive “the management team, Telefonica’s strategy and ability to create value,” the Spanish carrier said.

Telefonica shares rose 3% to €3.87 in Madrid trading on Wednesday, making the carrier the best performer on the Stoxx 600 Index at that point. STC’s shares were broadly unchanged.

The acquisition comes with “pretty good timing,” Bestinver Securities analyst Ignacio Arce told Bloomberg News via email. Telefonica’s executive chairman, Jose Maria Alvarez-Pallete, is preparing to lay out a new vision and strategy for the company at a November meeting, the company’s first capital markets day in over a decade.

Pallete, who has held the top job since April 2016, has for years struggled to attract investors and meaningfully grow profits in Spain, the firm’s biggest market. Shares have plunged by about 60% since he took over.

Bloomberg Intelligence analyst Erhan Gurses said the carrier could yet receive more investment from Saudi Telecom if it gets government approval. “Subdued European telecom valuations support long-term industrial investment appeal and the Saudi carrier’s investment reflects its ambitions of geographical expansion,” he said.

The Saudi Telecom stake also underscores the growing influence of Middle Eastern carriers in Europe. Abu Dhabi’s Emirates Telecommunications Group has emerged as Vodafone Group Plc’s biggest shareholder and agreed to pay $2.4 billion for a controlling stake in some of PPF Telecom Group’s assets in Eastern Europe — part of a government mandate to seek opportunistic deals. 

Read More: Telefonica to Revamp Strategy After Price-Hike Gamble Pays Off

Saudi Telecom is 64% owned by the Saudi sovereign wealth fund, which is chaired by Crown Prince Mohammed bin Salman. The company is the biggest telecom firm in the Middle East and has been looking to diversify its operations over the past few years. For this, it has created a new tower operations unit, spun off its data center and internet services businesses and is building out a digital bank, STC Pay.

Earlier this year, the company announced the acquisition of a portfolio of telecom assets in eastern Europe in a deal valued at about $1.3 billion. Last year, it invested in towers in Pakistan. 

Telefonica also operates in the UK, Germany and major Latin American markets. In recent years, it has been touting a strong shift toward expanding technology services for clients as well as investments in telecom infrastructure. Earlier this year, Telefonica and Saudi Telecom signed a partnership, agreeing to explore joint business opportunities together in areas including cybersecurity and cloud services. 

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