Telefónica postpones any decision on STC until the Government's resolution is known

The expected board of directors of Telefónica held on Wednesday, the first after the announcement of the entry into the capital of the operator of Saudi Telecom Company (STC), has been calmer than expected. The president of the Spanish multinational, José María Álvarez-Pallete, has reassured the main shareholders (La Caixa, BBVA and the Blackrock fund) about the "friendly" intentions of the Saudi group, which has transferred that it will not interfere in the management of the company, according to sources familiar with the meeting.

STC's intention is to request the plácet to the Government of Spain to make effective the purchase of 5% of the capital that it maintains parked in financial instruments and, together with the 4.9% that it already officially holds, consolidate its position as the first shareholder of the Spanish operator. Only when it has that official permission, the Saudi company will ask for a seat on the board, although it has reiterated its support for the current management team, according to sources consulted by this newspaper.

In view of the board meeting, the president of Telefónica handled first-hand information, since he has held at least two meetings with the STC leadership. He traveled to Riyadh on the 7th with the CEO, Ángel Vila, two days after the Saudi group announced the entry into the capital of the Spanish company. And last week, on the 18th, he met again with the CEO of STC, Olayan Alwetaid, on the occasion of a meeting of the GSMA, the world organization of telecommunications operators, whose rotating presidency holds Pallete.

However, the entry of STC was not the main issue on the agenda of this meeting of the council, which was ordinary, since it was convened in advance as every last Wednesday of each month. Although on this occasion the operation of the Saudis has focused the attention of the directors, in particular of the independents, since the dominicals (BBVA and La Caixa) were aware. Pallete has already held talks with Carlos Torres, chairman of BBVA, and Isidro Fainé, chairman of Criteria Caixa and vice-chairman and board member of Telefónica, to explain the Saudi move, which he officially learned of the same day it occurred. La Caixa and its investment arm Criteria own 5.98% of Telefónica's capital. Blackrock has 4.98%, and BBVA 4.87%.

The attitude of the board and the managers of Telefónica is to "wait and see" because they understand that now the ball is in the court of the Government, which must decide on the entry of STC, according to the aforementioned sources, although the Saudi group has not yet formalized that request to the Council of Ministers, as admitted this week Nadia Calviño, First Vice-President and Minister of Economic Affairs and Transformation.

The Government has the power to paralyze the takeover of 9.9% of Telefónica by STC, 64% owned by the Saudi State through the sovereign fund FIP, for reasons of national security, since the Spanish multinational is a strategic company with contracts with the Ministry of Defense in telecommunications and cybersecurity. It can even apply a 2003 rule (Article 7 of Law 19/2003), which would allow it to suspend, almost at will and without any limit, the entry of the Saudis into the capital of Telefónica. However, everything indicates that the Executive will authorize the operation, but subjecting it to a series of conditions similar to those applied in 2021 to the purchase of 23% of Naturgy Energy Group by the Australian fund IFM Global Infrastructure, according to EL PAÍS.

These conditions include support for certain corporate policies, such as investment in projects important to the country; the maintenance of headquarters and employment in Spain; a prudent dividend payment policy and an investment-grade leverage ratio. In addition, the buyer would be obliged to refrain from supporting potential sales of critical assets or backing any offer to take the company public.

The Executive is aware that a frontal veto to the operation would send a very negative message to foreign investors such as the Public Investment Fund (FIP) of Saudi Arabia. The mobilisation capacity of this type of funds dependent on state capital has been demonstrated this week at the Annual Meeting of the International Forum of Sovereign Wealth Funds (IFSW) that took place in Madrid, and in which more than 200 representatives of 45 sovereign wealth funds participated, institutional investors, companies and Spanish politicians, among others.

Movements of the action and plan of casualties

Given the entry of STC in the capital of Telefónica, the main shareholders of the operator are positioning themselves with purchases of securities in the market. Criteria Caixa has acquired more than 750,000 shares in recent months, with a total investment of 3.1 million euros and prices ranging from 3.73 euros at the start of the month to just over four euros in the latest transactions, as reported to the National Securities Market Commission (CNMV). By contrast, US fund Blackrock, which has no representative on the board, recently raised its short position in Telefonica to 0.6%, from 0.5% previously. In this way, the North American investment fund is betting on a drop in the price of the Spanish operator, which on the 19th closed above four euros for the first time since May 10.

The shares of Telefónica ended the day on Wednesday at 3.865 euros, leaving 1.7%, although with a revaluation of 12.3% so far this year and 3% compared to the 3.75 euros in which it closed on day 5, when the irruption of STC in the company was made public.

Precisely, the revaluation of the share to reward the confidence of shareholders is the first objective that Álvarez Pallete has set himself in the new strategic plan for the years 2023-2026 that he will present on November 8 at the company's first Investor Day in 12 years. When Pallete became president of Telefónica on April 8, 2016, the share was trading at 9.31 euros, more than double the current price and far from the 20 euros it reached in 2007.

The entry of STC occurs in a very convulsive scenario of telecommunications in Spain afflicted by low cost competition from companies such as Digi that are dynamiting prices and snatching customers and income from large operators. To alleviate the effects of that earthquake, Orange and MásMóvil have decided to merge, and are pending permission from Brussels. For its part, Vodafone negotiates the sale of its Spanish subsidiary to the British fund Zegona. And Telefónica, which due to its nature as an incumbent operator cannot afford this type of corporate operations, must convince new investors such as the Saudi group to shore up their investments or cut costs. Among them, the labor ones, since, according to union sources, the company prepares a new voluntary leave plan (PSI) after the one applied between 2021 and 2022 that affected 2,300 workers with a cost of more than 1,300 million euros.

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