Saudi Telecom and Telefonica both looking at M&A in Spain

The pair are keen to acquire Avatel, which is soon to become Spain's fifth-largest telecoms operator, but despite their existing links they are not working together on a bid, El Economista reported on Monday.

It's clearly every man for himself in the Spanish market, with Telefonica looking to capitalise on the regulatory freedom the Orange/MasMovil tie-up may well afford it, while STC seeks out new opportunities to establish a European footprint.

The Saudi incumbent picked up a 9.9% stake in Telefonica last year – or technically 4.9% of the telco's shares and another 5% in derivatives that it could convert into voting shares – noting that the move formed part of an ongoing growth strategy that includes expansion into promising markets. The Spanish government was clearly a little disquieted by the move and promptly acquired a big chunk of Telefonica for itself.

But moving for Avatel gives the Saudi operator a different route into Spain. The business, which offers quad-play services in Spain, has grown exponentially in recent years thanks to the acquisition and integration of no fewer than 155 smaller service providers and is now worth about €1 billion, El Economista reported. Last year alone it added 25 new operators for a total investment of €85 million, the paper said.

No wonder the telco finds itself at the centre of M&A speculation.

It's tempting to view STC's interest in Avatel as simply a way to expand into Europe. As the paper points out, the Saudi operator is closely linked with the sale of Altice Portugal – on Friday Bloomberg sources claimed it was the highest bidder for Patrick Drahi's troubled telco – and has also indicated it could be interested in TIM.

However, El Economista suggests that STC could be using its interest in Avatel as a bargaining chip with a view to getting the go-ahead to take a bigger stake in Telefonica.

For its part, Telefonica also sees the promise in Avatel and will soon be in a stronger position to pounce than it has been to date. Or as El Economista puts it, it "will soon enjoy a freedom of movement that was unthinkable a few years ago."

Essentially, the European Commission's decision to allow the merger of Orange with MasMovil creates a player with the scale to rival that of the incumbent; where once any acquisition may have been vetoed, now it stands a greater chance of getting past competition regulators. Indeed, the newspaper cites Telefonica CEO Ángel Vilá as saying almost exactly that at the telco's full-year results announcement: the operator has "a window of opportunity" from a competition perspective, he said.

Acquiring Avatel would also be a strategic move for Telefonica, which is its wholesale supplier, the paper said. It would doubtless be keen to protect that revenue stream.

There has been so much interest in Avatel in recent months as to make a defensive move of that ilk a sensible option. However, the paper indicates that one player formerly linked with the telco has now dropped out of the equation. Zegona Communications had been sniffing around Avatel but is apparently no longer interested having inked a €5 billion deal for Vodafone Spain in October. The UK-based investment firm plans to focus on building up Vodafone's existing business rather than expanding further through M&A.

But even with Zegona out of the running, there are still some big names eyeing up Avatel. We could be in for some more interesting times in the Spanish market, even before the ink is dry on the Orange/MasMovil deal.