Spain Scrutinizes Saudi Telecom’s Stake in Telefonica Amidst Strategic Concerns

Spain is closely examining Saudi Arabian group STC’s purchase of a 9.9 percent stake in Telefonica, raising potential challenges to the transaction in order to safeguard its strategic interests. The move by STC to acquire this significant stake in Telefonica would make it the largest shareholder in the Spanish telecommunications company.
Telefonica’s 5G network in SpainActing economy minister Nadia Calvino confirmed that STC had informed the Spanish government of the deal, highlighting that Telefonica is a strategically important company for Spain. She stated, “Telefonica is a strategic company for our country, and as a government, we will apply all the mechanisms that are necessary to prioritize the defense of our strategic interests.”

Spain could potentially block STC’s stake purchase, as Telefonica provides services to Spain’s defense industry, allowing the government to intervene in acquisitions of holdings exceeding 5 percent, Reuters news report said.

An official familiar with the government’s position indicated that Madrid intends to exercise its authority to approve or reject the operation, asserting that it has oversight due to Telefonica’s ties to national defense.

Acting Social Rights Minister Ione Belarra emphasized the importance of public control over strategic companies from both a democratic and security standpoint. She suggested that the state holding company SEPI should acquire a 10 percent stake in Telefonica over the coming years to lead digitalization efforts.

While some voices, such as the trade union UGT, welcomed STC’s investment as a capital inflow that consolidates future investments and job security, others, like Spain’s largest union CCOO, urged caution and responsibility and pledged to closely monitor STC’s next steps.

STC announced on Tuesday that it had acquired a 9.9 percent stake in Telefonica valued at 2.1 billion euros ($2.25 billion), following a pattern of Middle Eastern companies investing in European and Latin American telecom operators.

STC, Saudi Arabia’s largest telecoms operator, is 64 percent owned by Saudi Arabia’s Public Investment Fund (PIF) and plays a pivotal role in Crown Prince Mohammed bin Salman’s Vision 2030 initiative to diversify the nation’s economy away from oil dependence.

European telecom companies like Telefonica have been grappling with substantial debts amid sluggish growth in the mobile sector and substantial investments in emerging technologies such as 5G. These companies have been exploring various strategies to raise funds, including selling off tower businesses and advocating for market consolidation.

Telefonica’s total debt nearly doubles its market value, standing at nearly 22 billion euros. Analysts believe that STC’s investment could provide a much-needed boost to Telefonica, particularly as it seeks to roll out fiber broadband and 5G technologies in key markets.

The Spanish government had previously introduced legislation to block acquisitions of stakes of 10 percent or more in listed companies by entities from outside the European Union and European Free Trade Association, aiming to prevent hostile takeovers of devalued companies following the COVID-19 pandemic. The threshold for government intervention was recently reduced to 5 percent for firms connected to defense.

Calvino confirmed that Madrid is evaluating the application of relevant defense mechanisms, the sector’s implications for Spain’s security, STC’s shareholding, voting rights, and participation in the company’s decision-making bodies.

Telefonica is listed as a defense provider on government websites, supplying systems, equipment, and satellite services to the defense ministry’s aerospace arm.

In addition to concerns about Telefonica’s defense connections, Spanish officials are also examining STC’s relationship with telecommunications giant Huawei Technologies, including a recent Memorandum of Understanding between the two to develop fiber-optic broadband. Spain has not joined the group of ten EU countries that have banned Huawei and ZTE from their 5G telecom networks, but EU pressure to do so is increasing. Huawei, ZTE, and China have consistently rejected Western allegations of espionage involving their products.

Telefonica described STC’s investment as “friendly,” and STC intends to secure voting rights for its 5 percent economic interest in Telefonica after obtaining regulatory approvals. Telefonica’s shares rose 2 percent on the Madrid stock exchange following the announcement.

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