The Impact of Saudi Telecom Company’s Stake in Telefónica on Spain’s Strategic Interests

Introduction

In a surprising move, Saudi Telecom Company (STC) has acquired a 9.9 percent stake in Telefónica, one of Spain’s largest companies. This investment, valued at 2.1 billion euros, marks the latest entry of Gulf public telecommunications companies into the European market. The acquisition has raised concerns in Spain about safeguarding its strategic interests and potential implications for national security.

STC’s Stake in Telefónica

STC, majority-owned by Saudi Arabia’s sovereign wealth fund, informed only select parties – including the Spanish government and Phone – shortly before publicly announcing its decision. While the investment would make STC Telefónica’s largest shareholder, the Saudi group clarified that it does not seek a majority stake.

Spain’s Reaction

Nadia Calviño, one of Spain’s deputy prime ministers, emphasized the importance of Madrid’s approval and openness to foreign investments. However, she also highlighted the need to safeguard Spain’s strategic interests. The government is analyzing the deal and will apply all necessary mechanisms to protect the country’s interests.

Market Impact

Initially, Telefónica’s shares experienced a surge of over 2 percent upon the announcement. However, the gains were short-lived, with the company’s value settling just below 22 billion euros by early afternoon. STC acquired 4.9 percent of Telefónica’s shares and holds financial instruments representing an additional 5 percent of the share capital. Approval from the Spanish government is required to convert these instruments into shares due to Telefónica’s involvement in national security and cyberdefense.

Factors for Consideration

The Spanish authorities will consider several factors when evaluating the deal. These include Telefónica’s ties to the defense sector, the exercise of voting rights, and shareholder participation on its board. Their decision will shape the future of STC’s position within the company.

Telefónica’s Significance

Telefónica, with its diverse portfolio of best-in-class infrastructure assets, is a critical player in the telecommunications industry. The company is actively developing cutting-edge technologies in areas such as cognitive intelligence and the Internet of Things. Its strategic importance to Spain cannot be understated, as it remains the largest market for Telefónica, generating 27 percent of its revenue in the last quarter.

Gulf Countries Expanding Global Reach

Saudi Arabia and other Gulf countries have been seeking opportunities to expand their global reach and diversify their investments. Boosted by rising oil prices, they are actively seeking deals amidst falling valuations. Last year, Saudi Arabia’s Sovereign Public Investment Fund backed a successful takeover bid for Vodafone’s tower business. Neighboring UAE investment group e& also increased its stake in Vodafone. STC’s investment in Telefónica aligns with this trend and reflects the continuing influence of sovereign wealth funds from the Gulf region.

The Importance of Safeguarding Strategic Interests

Spain’s cautious response to STC’s investment in Telefónica stems from the need to protect its strategic interests. As the telecommunications industry plays an increasingly crucial role in national security and cyberdefense, foreign investments in companies like Telefónica can have far-reaching implications. Spain must carefully consider the potential risks and benefits associated with such investments, ensuring that its strategic infrastructure remains secure.

The Future of Telecommunication Investments

STC’s investment in Telefónica is part of a broader trend of telecommunications companies seeking opportunities for growth and expansion. As technology continues to evolve and shape the global economy, telecommunications companies from around the world are vying for strategic partnerships and investments. The increasing interconnectivity of nations, facilitated by telecommunications networks, necessitates a careful balance between foreign investment and national security.

Summary

Spain finds itself at a critical juncture with the acquisition of a nearly 10 percent stake in Telefónica by Saudi Telecom Company (STC). While welcoming foreign investments, Spain is prioritizing the defense of its strategic interests and the protection of national security. The government is carefully evaluating the deal, considering factors such as Telefónica’s involvement in the defense sector and the exercise of voting rights. The investment reflects the broader trend of telecommunications companies from Gulf countries seeking expansion opportunities in Europe. Telefónica’s significance as a telecommunications leader cannot be overstated, making the deal a strategically important event. Spain’s response highlights the challenges and opportunities associated with foreign investments in critical sectors, emphasizing the need for comprehensive evaluations to balance national security and economic growth.

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Spain pledged to defend its “strategic interests” after Saudi Telecom Company decided to take a nearly 10 percent stake in Telefónica, one of the country’s largest companies.

ITS revealed on Tuesday evening that it was acquiring a 9.9 per cent stake valued at 2.1 billion euros, marking the latest foray of the Gulf public telecommunications companies into Europe.

The Saudi group, majority-owned by the country’s sovereign wealth fund, only informed Phone and the Spanish government on its actions shortly before releasing the public announcement.

STC’s plan would propel it past CaixaBank and BBVA – two stalwart Spanish companies with large stakes in the group – to become Telefónica’s largest shareholder. But STC said it was not seeking a majority stake.

Nadia Calviño, one of Spain’s deputy prime ministers, sought to strike a diplomatic tone in her initial comments on the move, reminding the STC that she needed Madrid’s approval while stressing the openness of the Spain to foreign investment.

She said the government was analyzing the deal and would “apply all the necessary mechanisms, always bearing in mind the defense of Spain’s strategic interests”.

Shares of Telefónica initially jumped more than 2 percent following Wednesday morning’s announcement, but gave up most of their gains by early afternoon, leaving the company valued just under of 22 billion euros.

STC said in a press release that it had acquired 4.9 percent of Telefónica’s shares along with “financial instruments giving economic exposure to an additional 5 percent of Telefónica’s share capital.”

It plans to convert these instruments into shares but needs official approval because the law requires government permission for any foreign investor to take a 5 percent or more stake in certain “strategic” defense companies. Telefónica falls into this category because it has activities related to national security and cyberdefense.

Calviño said authorities would consider a variety of factors, including Telefónica’s ties to the defense sector, exercise of voting rights and shareholder participation on its board.

STC chief executive Olayan Alwetaid said in a statement that the company views the purchase as “an attractive investment opportunity to utilize our strong balance sheet while maintaining our dividend policy.”

Telefónica noted “STC’s friendly approach and support [of] management team, Telefónica’s strategy and its ability to create value”.

Spain remains Telefónica’s largest market, accounting for 27 percent of its revenue in the last quarter, followed by Brazil with 20 percent, Germany with 18 percent and the UK – where the company owns part of Virgin Media O2 – with 13 percent. .

STC said the Madrid-based company has “a unique portfolio of best-in-class infrastructure assets” and is developing cutting-edge technologies in areas such as cognitive intelligence and the Internet of Things.

The deal comes months after Tawal, a unit of STC, bought tower infrastructure from United Group for 1.2 billion euros, and at the same time that the Gulf countries are using their wealth – boosted by the rise oil prices – to seek deals amid falling valuations. . Last year, Saudi Arabia’s Sovereign Public Investment Fund backed a successful takeover bid for Vodafone’s tower business.

Neighboring UAE investment group e& increased its stake in Vodafone to 14.6% in April from 9.8% in 2022.

In Saudi Arabia, state-backed national champions have sought to expand their global reach alongside the PIF, which has invested in everything from video game companies and sports to electric vehicles and technology.

The Saudi National Bank, the country’s largest lender, acquired a 9.9 percent stake in Credit Suisse late last year and inadvertently helped precipitate the bank’s downfall when the chairman of the SNB ruled out increasing its stake, sending shares of the Swiss bank plummeting.

STC is Saudi Arabia’s largest communications company, with over 80 percent market share. Its turnover amounted to 17 billion dollars last year.

Additional reporting by Ivan Levingston in London and Simeon Kerr in Dubai