A wave of cross-border investment has seen some operators – directly or indirectly – acquiring shares in their peers. We outline a number of recent developments in the market and in legislation, and consider what's next for foreign investment regulation.
Purchases of equity stakes in some well-known operators has fuelled speculation of potential takeover bids. However, these deals have come amid heightened political sensitivity about ownership of strategic national assets, including telecoms networks, and new legislation limiting the investment ambitions of foreign firms.
From analysing transaction announcements, there are four primary reasons for recent inter-operator investments: the chance to support an existing growth strategy; the scope for international expansion; the potential acceleration of target business transformation; and capitalising on an undervalued opportunity.
Foreign interests have caused some governments to strengthen legal frameworks, including in France and Italy. The latter has leveraged its ‘Golden Power’ rules to veto proposed takeovers – often from Chinese organisations – of domestic firms considered to operate in strategically important sectors, including semiconductors.
Some countries are weighing up further action to protect assets considered key to national security. While Spain’s sovereign wealth fund may look to take a stake in former incumbent Telefónica, the UK Government could tighten legislation that would bring more operators within the scope of foreign investment rules.
The building up of equity stakes have fuelled speculation about potential takeover bids
There is increasing cross-pollination happening within the telecoms industry, with operators – directly or through an affiliated investment vehicle – buying stakes in their peers (see Figure 1). Since November 2022 for instance, Iliad (Europe) owner Xavier Niel has quickly ramped up his stake in Millicom (Luxembourg-headquartered but Latin America-focused) to over 24% via Atlas Investissement. In August 2023, e& (largely Middle East and Africa) announced it would acquire a stake of 50% plus one share in the assets of PPF Telecom (a PPF subsidiary) in Bulgaria, Hungary, Serbia and Slovakia for a purchase price of up to €2.5bn (£2.17bn). These deals reflect an emergent trend, which looks set to continue and has even seen speculation about potential takeover attempts. However, amid these transactions, there has been heightened political sensitivity about ownership of strategic national assets, including telecoms networks, and legislation governing foreign investment to navigate.
Four main reasons for recent cross-border investments in telecoms
On several occasions, the purpose of cross-border investments has been to gain control of another operator – i.e. a takeover. For example, in Austria, America Movil (predominantly Latin America) gradually built up its initial stake in A1 Telekom Austria Group before its accumulation of shares required it, under the Austrian Takeover Act, to launch a public takeover offer for all outstanding shares. Similar transactions include Monaco Telecom/MTN Cyprus in Cyprus, Monaco Telecom/Vodafone Malta in Malta, Iliad/Play in Poland and Altice/Portugal Telecom in Portugal, all of which saw the acquiring party successfully secure control of its target. In the Netherlands, America Movil launched an unsolicited €7.2bn (£6.2bn) takeover bid for KPN in 2013. Although this was unsuccessful, America Movil has increased its shareholding since around 2020.
From analysing several announcements of recent investments, the motivations for these deals can be categorised as follows:
Investment opportunity: STC stated the signing of a ‘Strategic Partnership’ with Telefónica represents a continuation of its growth strategy, while Iliad-controlled Carraun (parent company of Eir in Ireland) aims to use its 6% stake in Proximus to drive a mutually-beneficial relationship with the Belgian operator over the long-term. In the UK, Altice has characterised its investment in BT as a reflection of its support for the leadership and its strategy, rather than a precursor to a takeover offer;
International expansion: For e&, acquiring a controlling share in PPF Telecom helps it to establish a major telecoms presence in Central and Eastern Europe, and supports its push to become a leading ‘global technology group’ while generating synergies in areas such as wholesale and roaming arrangements. e& has also gained indirect access to the European market via Vodafone, where it has now acquired a 14.6% shareholding via the operators’ ‘strategic relationship’;
Business redirection and restructuring: Though Xavier Niel (via Atlas Investissement) currently only holds a 2.5% stake in Vodafone, the Iliad owner has called on the operator’s board to accelerate both the streamlining of Vodafone’s footprint and the sale of infrastructure assets to reduce debt, and to pursue consolidation and cash generation. Similarly, in the case of Millicom, Niel has stated that the operator’s potential remains untapped, but that he has a clear view on how hidden value can be unlocked; and
Opportunism (rather than activism): Liberty Global is also an investor in Vodafone, currently holding a stake of 4.92%. The thrust behind this investment reflects Liberty Global’s view that Vodafone’s current share price does not reflect the underlying long-term value of its operating businesses, or its announced consolidation and infrastructure opportunities. Liberty Global has stated that it does not intend to seek a board seat, although it could look to use its shareholding to progress its desired future for VodafoneZiggo in the Netherlands.
These foreign interests have caused some governments to strengthen their legal frameworks
While such transactions between private firms, often in adjacent countries, have not tended to alarm competition authorities, they have caused concern among some governments. Amid a potential takeover of KPN by America Movil around a decade ago, the Dutch Government sought to protect the ‘public interest’ through binding agreements, emphasising the importance of KPN's network for the emergency services and its use by state bodies. The Government also stated that an acquisition of KPN by a foreign company could have implications for the Netherlands’ national security.
Security concerns have intensified, typically in the context of potential acquisitions of national champions (increasingly in the tech sector) by state-owned firms or investment funds. e& is 60% owned by the Emirates Investment Authority, the UAE’s sovereign wealth fund, while STC is 64% owned by Saudi Arabia's Public Investment Fund (PIF). The Italian Government has leveraged its ‘Golden Power’ rules to veto proposed takeovers – often from Chinese organisations – of domestic firms considered to operate in strategically important sectors, e.g. semiconductors. Foreign investment legislation is now also in place in a growing list of countries, although the threshold at which national security agencies would intervene differs (see Table 1).
Under the National Security and Investment (NSI) Act, the UK Government will automatically review any stake of 25% or more held by an overseas entity in a firm considered critical to national security. The law, which came into force in January 2022, has enabled policymakers to block the sale of Newport Wafer Fab – a semiconductor company – to Chinese-owned Nexperia and (retrospectively) prohibit the acquisition of fibre altnet Upp by LetterOne, a Russia-linked investment group. Under the NSI Act, the Government decided to investigate Altice’s purchase of 18% of BT seemingly on the basis that the scale of shareholding would allow Altice to materially influence BT’s group-level policy. Nevertheless, its “full national security assessment” ultimately determined that no further action was required.
Spain and the UK are considering further steps to protect assets considered key to national security
Against this legislative backdrop, there is a question as to whether continued inter-operator investment will lead to responses from governments keen to preserve domestic control over telecoms providers. Blocking transactions on the basis of national security comfortably remains the exception rather than the rule, at least in Europe, although it has been reported that Spain (via the sovereign wealth fund Sociedad Estatal de Participaciones Industriales, or SEPI) is weighing up plans to take a significant stake in Telefónica to provide a counterbalance to the ambitions of STC.
SEPI has confirmed that it is monitoring the situation and exploring a possible acquisition of a shareholding. Whether that materialises remains to be seen, but it is already clear that the Spanish Government is prepared to defend its strategic interests, with its former incumbent operator playing a key role not only in telecoms but in sensitive national and cybersecurity matters as well. STC has stated that it does not intend to amass a majority stake in Telefónica. It has also not moved to convert the 5.0% stake that is derived from financial instruments into shares (to increase its voting power).
Legal frameworks and the scope for a regulatory reaction may therefore be discouraging some operators from increasing their interests in peers abroad. While e& is open to exploring further European expansion with PPF and in August 2023 offered to up its Vodafone stake to 20%, CEO Hatem Dowidar has previously stated that the operator will not acquire an interest exceeding 24.99%. In May 2023, Altice increased its stake in BT to 24.5%, but rejected talk of it making a full offer for the former incumbent. However, change could be on the horizon, with the UK Government launching a review of the NSI Act. The purpose of which is to narrow and refine the act’s provisions, and provide greater clarity in order to limit the burden on the private sector.
While amendments to the regime could make the UK a more attractive market for inward investment, the Government is actually considering reducing the £50m turnover threshold for public electronic communications networks or services (PECN/S) and submarine cable systems. Instead of spelling deregulation, such a move could bring certain altnets within scope of the NSI Act, either immediately or in the future (should they become profitable). The proposed merger of the UK businesses of Vodafone and CK Hutchison Holdings – a Hong Kong-based group – is also guaranteed to attract scrutiny under the act, while being reviewed on competition grounds. With the diverse and evolving telecoms sector considered integral to national security, the Government may soon bolster its ability to intervene in the market, potentially tempering incentives for further foreign investment in UK operators.
