Spain to buy 10% share in Telefónica in response to Saudi stakebuilding

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Spain is to buy a stake of up to 10 per cent in Telefónica in a bold response to a move by Saudi Arabia’s STC Group to acquire 9.9 per cent of the telecommunications company.

Spain’s decision raises the intensity of a battle for influence at Telefónica, a national champion with businesses in security and defence. It has been targeted by STC — majority-owned by Riyadh’s sovereign wealth fund — as the Saudi group seeks to expand its investments in Europe.

The Spanish cabinet issued the order for the stake to be acquired with the aim of giving Telefónica “shareholding stability”, according to a filing made by the government holding company that will buy the shares. The stake would be worth about €2.1bn at today’s valuation,

Nadia Calviño, Spain’s outgoing deputy prime minister, said on Tuesday that the move was “in line with other large European countries, such as France and Germany, which have and are increasing their shareholdings in big and strategic telecommunications operators”. She did not comment on STC.

Spain’s move came more than three months after STC shocked the Spanish establishment by announcing that it had spent €2.1bn in acquiring a 4.9 per cent stake in Telefónica and derivatives that gave it an economic interest in a further 5 per cent.

To raise its stake to 9.9 per cent STC will need to convert the derivatives it has bought into equity. However, for a stake above 5 per cent, it will need Spanish government approval. A decision on allowing the expansion to 9.9 per cent is not expected until early next year.

STC’s move was the first time a Saudi institution has taken a large stake in a big Spanish group.

Sepi, the Spanish government holding company, said its planned stake would help Telefónica to “achieve its objectives and will contribute to safeguarding its strategic capabilities”. It would mark the state’s return to Telefónica’s shareholder register for the first time since 1999, when the company’s full privatisation was completed.

Telefónica said it remained focused on the execution of its strategic plan in order to “continue creating value for its shareholders and providing the best-in-class service for its clients”.

Should the Spanish state and STC secure stakes of nearly 10 per cent, they will catapult past CaixaBank and BBVA — two pillars of corporate Spain — to become Telefónica’s largest shareholders.

Calviño said Telefónica “is without doubt the most strategic company in Spain, not only because of its presence in telecommunications infrastructure and innovation but also because of its weight in security and defence”.

Opinions have been split inside the government on STC’s move, according to officials. It was viewed favourably by those supportive of Spain’s strong trade ties with Saudi Arabia, but seen more sceptically by others wary of STC’s intentions.

STC has said it was not seeking a controlling stake in the company led by José María Álvarez-Pallete.

Telefónica’s share price has dropped by nearly 5 per cent since STC announced its plans. Tuesday’s announcement was made after the stock market closed.

Karen Egan, a senior telecoms analyst at Enders Analysis, said governments were becoming increasingly wary of allowing significant foreign influence over incumbent telecoms operators.

But she said Middle Eastern companies saw a chance to enhance their reputations by being associated with a “reasonably leading-edge, sizeable company” such as Telefónica. The United Arab Emirates group e& already has a stake in Vodafone.

STC chief executive Olayan Alwetaid has said that the Saudi telecoms group viewed the acquisition as a “compelling investment opportunity to use our strong balance sheet whilst maintaining our dividend policy”.

At an investor day in November Telefónica presented a strategic plan up to 2026, which included targets of 2 per cent annual growth in earnings before interest, tax, depreciation and amortisation and more than 10 per cent annual growth in free cash flow. It also committed to paying a dividend of at least €0.30 per share over this period.