DUBAI/MADRID, Sept 7 (Reuters) – José María Álvarez-Pallete, president and CEO of the indebted Spanish telephone and Internet services company Telefónica, received an unexpected call this week when he was in Silicon Valley to meet with companies and investors in technological capital.
He learned that Saudi Arabia’s largest telecommunications operator, STC Group, was aiming to be Telefónica’s largest shareholder, with a 9.9% stake. Within hours of Tuesday’s call, Álvarez-Pallete was headed to Riyadh, according to people with knowledge of the situation.
STC had spent months building up its 2.1 billion euro ($2.25 billion) stake, said the people, who requested anonymity because of the sensitivity of the matter. The move is a vote of confidence in Telefónica, burdened by billions of dollars in debt as STC gains experience in modernizing Saudi telecommunications infrastructure.
But some in Spain worry that the deal could give Saudi Arabia too much influence over the country’s telecommunications and internet infrastructure.
STC is 64% owned by Saudi Arabia’s Public Investment Fund (PIF), the main driver of Crown Prince Mohammed bin Salman’s Vision 2030 effort to build stakes in a range of global companies and free the Saudi economy from its dependence on the oil that made it. one of the richest nations in the world.
STC hopes ties with Telefónica will help it develop digital cities in Saudi Arabia, importing technological know-how from countries like Spain, according to a person who had advised the company. For Telefónica, whose market value has sunk to a third of its level eight years ago, the investment offers respite to long-suffering shareholders.
As Telefónica’s rivals cut prices to attract Internet users, the Spanish company also borrowed money to invest in new mobile and Internet networks. Exacerbating the problems, Telefónica has expanded in Latin America, where weak local currencies, stricter regulation and competition undermined its profits in the last decade.
“This provides a much-needed boost for Telefónica given the huge investment to roll out 5G fiber broadband in key markets,” said a PP Foresight analyst.
The new investor “brings confidence and value,” Telefónica’s main union, UGT, recognized on Thursday, although it was concerned about the growing influence of sovereign funds by theocracies.
Telefónica does not view STC as an aggressive investor that will seek management changes, according to a person with knowledge of management thinking.
But the secrecy with which STC (7010.SE) built his stake took some observers by surprise, the person said.
Speculation about a new major shareholder in Telefónica had been increasing. Last year, Telefónica’s management met twice with other companies and funds in the Middle East, people familiar with the matter said.
Telefónica said it was informed on Tuesday about STC’s investment, after the companies became better acquainted in recent months. In February they sealed a strategic partnership to work in fields such as cybersecurity and the metaverse.
In May, STC had hired advisers, including investment bank Morgan Stanley and law firm Linklaters, and began buying Telefónica shares on the market, two other sources with knowledge of the move said.
When the share approached 3%, STC stopped share purchases to avoid having to make an official market disclosure, one of the people said. STC tried to keep the stake secret until it could buy at least 9.9% of Telefónica, the person said.
On Tuesday, STC reached that goal, after acquiring an additional 2% stake from undisclosed investors, one of the people said. The rest, 5%, is made up of derivatives contracted by Morgan Stanley, and is pending regulatory approval from the Spanish Government, they said.
Central to the deal is STC chief investment officer Motaz Al Angari, a former Morgan Stanley banker, said a person with knowledge of the situation. STC confirmed his participation. While at the bank, Al Angari advised on the record public listing of giant Saudi Aramco.
STC officials declined to comment further. Morgan Stanley and Linklaters declined to comment. Telefónica said: “Our management, strategy and investment teams travel regularly to meet potential investors, not only in the Middle East, but around the world.”
In an attempt to reduce debt, Telefónica has sold much of its telecommunications infrastructure and is preparing to present a new strategic plan on November 8 focused on increasing free cash flow, which according to its CEO could reach 4,000 million euros this year.
STC has a cash reserve of 22.4 billion rials ($6 billion) that has been underutilized for many years, equity analysts at EFG Hermes said in a note to clients, so the deal should also be good for the company. Saudi company. However, they warned that STC’s “failed deals” in the past may worry some.
Since Tuesday’s news, Telefónica shares gained 2.4% while STC fell 1.1%.
Middle Eastern investors have been betting on Spanish companies for some time. The United Arab Emirates’ sovereign wealth fund Mubadala owns stakes in oil company Cepsa and gas pipeline operator Enagás, while Qatar’s QIA is a shareholder in Iberdrola.
It is a delicate topic in Spain. STC contacted the Spanish government on Tuesday to inform them about the involvement and that they did not want to take control, said Spain’s acting Economy Minister Nadia Calviño.
“We will apply all means at our disposal to defend our strategic interests,” he told reporters.
The deal comes at an opportune time for Saudi Arabia, which will soon host its annual financial conference attended by the world’s top bankers and billionaires, dubbed “Davos in the desert.”
“They want their local champions to become global players,” said a Gulf banker. “Over time they will become as important as Vodafone or Telefónica itself.”
(1 dollar = 0.9348 euros)
Additional information from Inti Landauro, Tomás Cobos in Madrid and Amy-Jo Crowley and Pablo Mayo in London; Written by John O’Donnell and Anousha Sakoui; Editing by Elisa Martinuzzi, David Gregorio and Ros Russell
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