Saudi Arabia has become Spanish telecom giant Telefónica’s biggest shareholder.
Saudi Arabia’s STC Group stealthily amassed a 9.9% stake in Telefónica over the summer. Its shares are worth €2.1 billion, Reuters reports.
The Arabian company is also seeking voting rights for its shares.
We “see this as a compelling investment opportunity to use our strong balance sheet whilst maintaining our dividend policy,” STC said in a statement, Reuters reports, adding it doesn’t intend to acquire “control or a majority stake.”
In announcing the investment, Telefónica described the Saudi’s move on the company as “friendly,” saying it had been informed on September 5th.
STC made a courtesy call to the Spanish government the same day, as announced by Spain’s acting Economy Minister Nadia Calvino.
“We will apply all the means at our disposal in the interests of defending our strategic interests,” she told reporters.
In response to the news, Telefónica’s share went up slightly while STC’s went down a point.
The purchase of a major share of Telefónica is part of Riyadh’s long-term strategy to shift the country away from economic dependence on oil and is its second recent venture into European communications. STC also invested in European telecommunications infrastructure last April when it agreed to buy tower infrastructure worth €1.2 billion from the United Group which operates in southeast Europe. It’s also part of a trend of Arabian telecom groups investing in Europe, Reuters reports. In March, the Emirates Telecommunications Group, known as ‘e&,’ increased its stake in Vodafone Group to 14%.
However, there are security concerns as STC is, in reality, an arm of the Saudi state, as it is 64% owned by Saudi Arabia’s Public Investment Fund, the fund itself controlled by Crown Prince Mohammed bin Salman. It is seen as part of his ambition to invest in income streams other than petroleum for his kingdom.
The Spanish station Cadena Ser reports that Brussels had already sounded the alarm on the investments by state-controlled foreign companies, particularly in strategic infrastructure such as telecommunication.
In a 43-page report to which the news outlet had access, the EU Commission warns that the traditional limits of “company ownership” are insufficient when behind the investor is a state or a sovereign fund like the Saudi one. It specifically mentions China and Saudi Arabia as countries of concern in this area, worrying that the interest of state-controlled companies or funds is not just commercial or monetary and that Europe is ill-prepared to protect itself.
Brussels cautions, too, that the danger is particularly acute when it touches on an industry by its nature closely connected to the government, as telecommunications are. Brussels fears the link will give foreign players the chance to “create channels of influence over European officials.”
“Against this threat of influence the EU is poorly prepared,” the report adds.
The recent Qatargate scandal in the EU parliament is proof positive.
To keep China, Saudi Arabia, and other countries out of the member states’ infrastructure, the EU’s report calls for greater regulatory capacity to exclude such companies from investing in areas critical to Europe’s security.
But for Telefónica, whose market value has dropped to a third of its worth from eight years ago, the Saudi investment was a much-needed boost.
According to Reuters, the Saudis are hoping not only for healthy dividends but also to import Spain’s telecommunications know-how to improve their own technological abilities, specifically to develop digital cities in Saudi Arabia.
The entry of Saudi Arabia into Telefónica speaks to two additional realities—the lack of cash in Spain to upgrade telecommunications infrastructure and the apparent naivete of companies like Telefónica in regard to foreign investors.
Telefónica found itself sinking financially not only due to an expansion into Latin America that has proven a disappointing return on investment but also because of the hefty borrowing required to invest in new mobile and internet networks.
“This provides a much needed boost for Telefónica given the huge investment to rollout fibre broadband 5G in key core markets,” an analyst at PP Foresight told Reuters.
Additionally, Telefónicahad been looking for a new investor for some time and had been courting other companies in the Middle East, as well.
Then, just when Telefónica seemed to least expect it, Saudi Arabia came on the scene.
The long-term goal of Riyadh is not to beat Europe at its own game.
“They want their local champions to become global players,” a Gulf banker told Reuters. “With time they will become as important as a Vodafone or Telefónica itself.”
