An Arab telecommunications operator sitting on the board of directors of a Spanish group that manages numerous sensitive contracts linked to national security and defense. The emergence of STC with up to 9.9% of Telefónica is not a simple transaction of a foreign multinational in a strategic company. The Government is studying formulas to veto the access of the company led by Olayan M. Alwetaid in this critical business. They have in mind what happened with Duro Felguera, where they were forced to divest from Epicom, key to the cryptographic encryption systems of the communications of Moncloa, Casa Real or the National Intelligence Center (CNI).
The Saudi company already has 4.9% directly of the telecom company chaired by José María Álvarez-Pallete after its purchase of securities behind the scenes thanks to the contract with Morgan Stanley. In addition, it increases another 5% through financial derivatives that can only be executed if authorized by the Government. In the last communication from the Saudi group, in the presentation of third quarter results, it called for “cooperation” but maintained its plans to reach that 10% and, therefore, claim the ‘green light’. It is not yet clear whether it has already been formally presented or not. From the Arab group they remain silent.
But the Government has been working on a solution for some time. The total veto has little chance of coming to fruition, since the message to international investors would be difficult to defend. The key lies in these defense contracts, whose information is especially sensitive and delicate. The Executive has always defended that they will protect the “strategic autonomy” of Spain. Now they are looking for legal formulas that, according to various sources, allow STC to veto access to this type of contracts, since everything indicates that it will claim a position on the board where it would coexist with the ‘historical partners’, BBVA and Caixa Bank.
The emergence of the Australian IFM fund in Naturgy, to which a series of conditions were required such as the limit on future dividends or relevant divestments to give the definitive green light, is not the only case that can serve as a model for the Council of Ministers in this task of limiting the impact of the arrival of STC to Telefónica. There is another even more relevant one, according to the same sources, due to their similarity in the sensitivity of the business linked to national security: Duro Felguera and its subsidiary Epicom.
The State Society of Industrial Participations (Sepi) rescued the company with 120 million euros. And the firm in exchange sold 40% of the capital of Epicom, its key subsidiary linked to military communications. A purchase option was reserved on the other 60% that was limited last March, extending it for another nine months. Finally, the state company did not take out the checkbook but two Spanish industrial investors did: Indra (30%) and Oesia Network (30%). This was a ‘sine qua non’ condition of the Council of Ministers to authorize the entry of the two Mexican funds -Grupo Prodi and Mota—Engil México- with two participatory loans for a total import of 90 million that implied that between them they would maintain total control of the company.
The complexity of this task also lies in the fact that there is no possibility of a divestment for Telefónica’s defense business. But the Government is analyzing the possibility of being able to inhibit STC from any matter that is dealt with in the council or through other administrative bodies and that is linked to national security. It must be remembered that the Arab group is especially interested in the entire portfolio of services linked to new technologies such as the cloud and others (at the beginning of the year they signed a commercial alliance to advance in that market).
Who should carry out this decision? The so-called ‘anti-takeover shield’ will pass into the hands of the Ministry of Economic Affairs, Commerce and Business currently directed by Nadia Calviño. The reason is that the Secretary of State for Commerce, which is in charge of receiving applications from foreign investors, becomes dependent on the organization chart of that department after the reorganization of the new Executive of Pedro Sánchez. Formally, the access door is the Investment Board, in which a representative of the CNI and another of the Operational Directorate of the Department of National Security of the Presidency of the Government are present. But the procedure involves a specific report from the Ministry of Defense. The proposal of this body must be submitted to the Council of Ministers, which has the final say.
A (delicate) growing business
It must be taken into account that Telefónica has accelerated its presence as a provider of critical services to the Ministry of Defense. In this year it has reached close to 300 million euros in direct awards from the department led by Margarita Robles. Among the most relevant in the last two years are the implementation of satellite telecommunications infrastructure for the Army (38 million) or the deployment of the first 5G networks in bases and ships of the Naval Force and the Marine Corps. (5 million).
To these we must add the launch of dark fiber (120 million); the launch of the Training Center for military operations in cyberspace (35 million) or the operation together with Indra of the Cybersecurity Operations Center (SOC) of the General Administration of the State that was awarded through a negotiated emergency procedure and without publicity for more than 46 million. In addition, the operator is part of the 8×8 armored vehicle project, providing more than 350 combat radios for the Armed Forces and the S-80 submarines where it develops cybersecurity systems together with Navantia.
Meanwhile, the State Society of Industrial Participations (Sepi) remains committed to building a Spanish ‘shareholding core’ to compensate for the entry of STC, with Caixabank and BBVA confirming that they do not intend to increase their position under any circumstances (between them they add up to around 10%, similar to the Saudis). Already in the relevant fact communicated weeks ago he announced that his desire was to enter with a percentage in the company. But the objective was to rely on local entrepreneurs. This strategy has not received significant support.
The ‘Vodafone case’
Telefónica’s governance became the elephant in the room during the so-called ‘Capital Markets Day’ that took place on November 8 in Madrid. The company committed to placing cash generation (and deleveraging) as a priority for the next three years. But none of the analysts’ questions focused on corporate governance and the possibility of change in the configuration of the board with STC and Sepi. The company already described the entry of the Saudis as a “friendly approach” on the same day of the relevant event in September. After the closing of that day with investors, the executive president, José María Álvarez-Pallete, highlighted the “strategic nature” of the company in the interest of these investors, but to justify the total deregulation that he once again defended.
Vodafone is the mirror in which the Spanish operator could look at itself. The Emirati firm e& controls 14.5% of the group after several increases and its intention was even to reach 20%. Although its initial intention was to maintain a ‘passive’ position, in May it proposed a strategic agreement in which it claimed a position on the board of directors and a series of strategic alliances. Precisely this November, the business division of the European telecom operator signed a memorandum of understanding with the emirates to “jointly market, sell and provide services” to companies and public sector organizations.
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