Telecom companies are looking for a lifeline
The hour of need for some is the opportunity of a lifetime for others. Arab countries have long begun to diversify away from their significant reliance on fossil fuels, such as oil and gas, by reinvesting their profits internationally. This has become more pronounced since the beginning of the Ukraine conflict, which has increased their role as a stabilizing force in the global economy. Recently, they have set their sights on the European telecom sector. This move is not coincidental, as many of these assets are available at bargain prices. The European telecom industry index, Stoxx Telecommunications, has dropped by nearly a quarter since the start of the pandemic in the spring of 2020, despite these companies having a resilient business model due to the essential role of stable digital networks during the COVID-19 crisis.
One of the hardest-hit telecom giants during this period has been Vodafone, whose stock lost roughly half of its value. The company faces intense competition in core markets like the UK, Spain, and Italy, and has also encountered numerous internal challenges, particularly in Germany. Vodafone's ill-advised and expensive acquisition strategy, including the purchase of cable companies for a combined total of nearly 20 billion euros, strained the company's resources to the point where there was no room for necessary investments. Additionally, the strategic growth expectations from these acquisitions did not materialize.
E& capitalizes on weakness
As a result, the company took a hit on the stock market, which made it possible for the state-controlled telecommunications company of the United Arab Emirates, Etisalat (E&), to seize the opportunity and acquire a 10% stake, later increasing it to nearly 15%. E& recently expressed the intention to aim for a 20% stake, establishing a significant presence within the British company.
Similarly, Saudi Telecom, which is also state-controlled, saw an opportunity to buy into the Spanish telecom giant Telefónica when its stock declined by approximately 40%. The Arabs currently hold a 4.9% stake, just below the threshold that would trigger a Spanish government review, which applies to state-relevant companies, including those that own critical infrastructure. However, the Saudis also hold derivatives that could extend their overall influence to 9.9%. Both companies have entered into a strategic partnership, indicating that the Arab investor is welcomed by Telefónica.
Many voices at the table
The situation at Vodafone is even more complex. The management under the new CEO, Margherita della Valle, faces not only operational challenges but also a new shareholder landscape that may assert its interests more explicitly. Liberty Global, which sold its cable activities in Germany (Unitymedia) and Eastern Europe to Vodafone for over 18 billion euros, used the decline in Vodafone's stock price to acquire a 4.9% stake. Furthermore, French billionaire Xavier Niel, the owner of the Iliad group, has acquired a 2.5% stake. It is also rumored that Cevian, an activist investor specializing in undervalued publicly traded companies, has taken a position at Vodafone.
In contrast to these investors, the Arabs are generally seen as silent investors who signal their support for the management's strategy with their involvement. They have been perceived elsewhere as a safety net. As shareholder-friendly stakeholders with a typically long-term investment horizon, they counterbalance the voices of activists and other strategic investors who often exert more pressure for change.
Additionally, this often closes the door for private equity firms. These investors have also rediscovered the telecommunications industry and aim to increase the visibility of the sum of the parts. This involves the disintegration of telecom network operators by separating certain assets and then merging them with others, often following a "Buy-and-Build" strategy. For example, KKR has persistently pursued Telecom Italia (TIM) for almost two years, initially submitting a complete offer for the entire group. However, their offer of 11 billion euros for the entire group in the fall of 2021 essentially valued the service business at zero. TIM has since decided to separate its fixed-line network, which is now valued at approximately 23 billion euros, according to offers, including one from KKR. TIM's major shareholder, Vivendi, values the network alone at 30 billion euros.
In the case of TIM, Vivendi appears to play the role of an anchor shareholder, similar to what the state represents elsewhere or long-term-oriented sovereign wealth funds, which are often from the Arab region. The French are in conflict with KKR over the valuation of the TIM network, but would likely sell if the price is right. This is not the case with state-controlled major shareholders. Both Deutsche Telekom and Orange have state backing, which, in addition to their own operational developments, may be a reason why their stock losses since the start of the pandemic have been significantly smaller. As a result, they provide little room for further major shareholders, unless they actively invite someone on board.
Nevertheless, the case of Credit Suisse has shown that Arab investors are not always a lifeline but can sometimes turn into a boomerang. In this instance, the Saudi National Bank accelerated the downfall of the Swiss bank by ruling out an increase in its investment during a time of need.