Gulf telcos should ignore Europe’s fading allure

Alamy via Reuters

Long-suffering investors in Gulf telecom operators would be forgiven for shuddering when reading a recent S&P Global Ratings report. Here they will learn that the region’s leading telcos “want to scale up their business and geographic footprints by increasing their exposure to stable European markets”.

Why the palpitations among minority shareholders? Well, e& (formerly Etisalat), Saudi Telecom Co (STC) and Ooredoo – the former telecom monopolies in the UAE, Saudi Arabia and Qatar respectively – wasted tens of billions of dollars between them on misadventures abroad in the noughties and 2010s. 

These losses arose in the countries such as India, Pakistan, Myanmar and Indonesia and seem to have ultimately convinced STC and e& to look to Europe instead as they revive their expansionist ambitions.

S&P says the continent is low risk and further acquisitions could increase cash flows as the European units’ capital expenditure – money spent building out new networks – declines.

Yet the report also forecasts European telecom operators’ annual revenue growth will average a lacklustre 2 percent.

The main attraction seems to be the euro and British pound’s relative steadiness versus the dollar when compared with emerging market currencies: the Egyptian pound (-85 percent), Pakistani rupee (-64 percent) and the Sudanese pound (-99 percent) have all tumbled against the dollar over the past decade, for example.

Sustained devaluations meant that even if a Gulf telecom operator’s subsidiary or affiliate performed well in local currency terms this improvement rarely translated into earnings windfalls back at headquarters where accounts are calculated in currencies pegged to the dollar.

So, “increasing their activities in Europe, where country risk is low and euro fluctuations are reasonably contained, should provide a currency hedge against other markets”, S&P Global wrote.

Can the prospect of less pronounced FX losses really justify spending nine or 10-figure sums on further European acquisitions?

European investments are even more curious when contrasting the continent’s anaemic growth rates with those of Saudi Arabia and the UAE

The euro has slumped to near parity against the dollar, falling 6 percent over the past six months as US President Donald Trump’s plans to impose import tariffs roil currency markets.

Similarly, most analysts view sterling’s long-term trajectory as downwards. The economic outlook across Europe hardly suggests the continent’s currencies could rebound.

The European Union’s GDP grew just 0.8 percent in 2024, the bloc says. The narrower eurozone economy will expand 1.1 percent in 2025 and 1.3 percent in 2026, Japanese investment bank Nomura forecasts, warning “US tariffs will be an additional drag on European growth and hit Europe’s already struggling manufacturing sector”.

Post-Brexit Britain is also toiling. GDP grew only 0.8 percent in 2024 and will expand a tepid 1.7 and 1.4 percent this year and next, accountancy firm KPMG predicts.

The Economy Forecast Agency says the euro and pound could fall a further 9 and 6 percent respectively versus the dollar by July, lowering not only the value of any assets denominated in these currencies but any dividends paid too.

The UAE’s e& already owns 15 percent of Vodafone Group, having spent about $5.87 billion building a stake in the London-listed company from early 2022, according to AGBI calculations based on e& statements.

But Vodafone’s shares have plunged to their lowest levels since the mid-1990s, leaving e&’s holdings worth £2.66 billion ($3.3 billion) and it nursing a paper loss of $2.57 billion.

An annual dividend windfall of €355 million ($362 million) is scant consolation, while Vodafone’s 8 percent dividend yield is based on its current market valuation, not the higher price at which e& invested.

Undeterred, e& last October bought 50 percent plus one share of PPF Telecom Group for €2.35 billion. PPF has operations in Bulgaria, Hungary, Serbia and Slovakia. The last uses the euro while the other nations’ currencies have fallen 4-8 percent against the dollar over the past year.

STC has also entered the European fray, buying 10 percent of Telefonica Group for €2.1 billion in 2023. The stock price of the former Spanish telecom monopoly has increased slightly since, but the weakening euro has eroded this gain in dollar terms.

• Ooredoo to build high-speed data network for GCC
• Saudi Arabia’s STC to build $9bn telecom network
• Doubt surrounds e&’s earnings as UAE tax rise looms

Minority shareholders seem unimpressed, especially those of e&. Its stock has fallen 56 percent from early 2022’s all-time high as its total borrowings more than doubled to AED51.6 billion ($14.1 billion) from AED25.7 billion in 2021.

STC’s shares are down 5 percent over the past three years, while the kingdom’s main stock index has gained 1.6 percent over the same period.

The duo’s European investments are even more curious when contrasting the continent’s anaemic economic growth rates with those of Saudi Arabia and the UAE, whose real GDP will expand 5.0 and 2.8 percent respectively this year according to S&P.

And for all their foreign forays – current and historic – it is their domestic businesses that matter most: e& boasts of operating in 38 countries yet earns two-thirds of its gross profit in the UAE, while about nine-tenths of STC’s revenue comes from within Saudi Arabia.

Much as an artist must know when to put down their brush and stop painting, Gulf telecom operators must learn to put away their chequebooks. 

Instead of expanding further in Europe, as S&P envisages, STC and Etisalat should ease their minority shareholders’ angst by focusing on home comforts instead. That way, they will avoid making further vanity investments and can raise dividends.

Matt Smith is an AGBI senior editor