Summary Bullets:
• Gulf states funds will continue to invest in European telcos, fueled by strong regional growth and large cash reserves.
• Gulf investment in European telcos will promote greater collaboration on innovation between Gulf-based and European telcos that are funded by the same fund entities.
Increased Investment in European Telco by Gulf States Investment Funds
Overall, mergers and acquisitions (M&A) activity in the technology, media, and telecom (TMT) segment has been increasing since 2018, but the trend reversed in 2022. Total global M&A deal value dropped 39% in 2022 to $754 billion, compared to $1.1 trillion in the previous year. Deal volume reached 612 deals in 2022, down 39% from 2021.
This is opposite to the Gulf region that experienced favorable investment, resulting in foreign investment from both state-owned and private companies in Saudi Arabia totaling $22.6 billion in the first 11 months of 2022, up from $2.2 billion over the same period in 2021. External factors influencing this include oil prices and a positive GDP growth rate.
The majority of inward and outward investment fund activity originates from sovereign wealth funds, e.g., Saudi Arabia’s state-owned Public Investment Fund (PIF). And in addition to investing in sectors like pharmaceuticals and renewables, sovereign-wealth-fund backed-up entities continue to drive outward investment in the TMT segment. Recent examples include Saudi Arabian STC Group acquiring a 9.9% stake in Spain’s Telefónica worth EUR2.1 billion ($2.25 billion) in a move to become the Spanish telecom giant’s top shareholder. STC Group’s strategic investment no doubt takes into consideration Telefónica’s recent performance and the position it takes in the European telco market: Telefónica Group achieved Q1 2023 revenues of EUR10.05 billion, up 6.7% despite global economic challenges including inflationary pressures. Telefónica’s revenues across its B2B digital transformation business unit rose by 43.5% in Q1 2023 to EUR429 million and achieved debt reduction by 3.5% compared to March 2022.
There are a number of factors influencing Gulf states outward investment, and it almost is the perfect tool for the region. However, from a telco segment perspective, investors are capitalizing on telco market conditions, which sees the European telco segment experiencing performance challenges, influenced by a changing ecosystem, new emerging players, inflation, and energy costs. Telcos’ strategic goals in driving profit margin and reducing debt, while also making the right infrastructure investments in areas like 5G and superfast broadband, will continue to create hurdles in the short to mid-term. Subsequently, Gulf states fund stability, bringing with it deep pockets, will be welcomed by board members across European telcos.
Other notable telco investment examples include UAE-based Etisalat by e&’s (e&) planned stake increase in Vodafone from 14.6% to 20%; and e& paying EUR2.2 billion ($2.4 billion) for a controlling stake in PPF Group’s (PPF Telecom) assets in Bulgaria, Hungary, Serbia, and Slovakia.
Gulf States Investment in European Telcos Will Accelerate Collaboration, Technology, and Skills Transfer
Mid to long-term trends of Gulf investment will accelerate collaboration between European and Gulf-based telcos that share the same investors. The telecom market is already experiencing this. For example, apart from being a majority investor, STC Group’s relationship with Telefónica consists of a partnership agreement under the Telefónica Partners Program for both companies and STC Group operating companies and affiliates in the Gulf states to explore opportunities in areas such as B2B and B2C, digital services (including cybersecurity, cloud, IoT, and big data), technology, innovation and procurement, and other strategic areas to promote growth and capture synergies. These trends will benefit the Gulf states, which has experiencing growth in digitization and innovation in telecoms. The relationship also benefits European telcos as it gives them access to wider markets in the Gulf states and elsewhere through investment expansion. However, the relationship overall in the long term could change the market landscape, particularly in innovation and capabilities bought to the market by Gulf-based telcos, and geographical conflict of interest.