Gulf Cooperation Council (GCC) telecommunication operators are focusing their merger and acquisition (M&A) activities. They want to scale up their business and geographic footprints by increasing their exposure to stable European markets, which mitigates the currency risk associated with other high growth countries. While valuations seem attractive (the average forward EV/EBITDA multiple for GCC operators is close to 6x compared with 5x for European peers according to S&P Capital IQ data) we do not anticipate GCC telcos will be seeking majority control. This is because local political and government strategic interests in the targeted telcos are likely to be a barrier. Therefore, investment levels and rating impacts will likely remain limited, though rating headroom could narrow for GCC telco issuers given the debt-funded nature of these transactions.

Here, S&P Global Ratings answers frequently asked questions from investors about GCC telco operators' international expansion activities, particularly in Europe, and the impact (or lack thereof) on credit quality.

Frequently Asked Questions

What are some examples of GCC telcos' recently announced international expansions?

Over the past 12-18 months we have seen GCC incumbents e& (AA-/Stable/A-1+) and stc (A/Positive/A-1) announcing expansions focused on core telco activities, particularly into Europe, in the form of bolt-on acquisitions as well as financial investments.

In the UAE, e& has acquired a 50% + 1 stake in PPF Telecom Group B.V. (now renamed e& PPF Telecom Group B.V.). Under the deal, the Abu Dhabi-based operator bought the service and infrastructure companies of assets in Bulgaria, Hungary, Serbia, and Slovakia for €2.36 billion (equivalent to UAE dirham [AED] 9.7 billion assuming €/AED=4.1) and fully consolidated these operations into its financials in October 2024. In 2023, PTCL Group, e&'s subsidiary, signed a share purchase agreement with Telenor Pakistan B.V. to acquire 100% of the latter for a total enterprise value of AED1.4 billion equivalent, subject to regulatory approvals. In September 2024, e& also increased its stake in U.K.-based Vodafone Group to 15.01% (up from 9.8% in May 2022), making it the largest single shareholder and changing its accounting treatment of the holding to the equity method (from a financial investment previously).

In Saudi Arabia, stc acquired a 4.9% stake in Telefonica Group, before receiving approval from the Spanish Council of Ministers in November 2024 to increase its ownership to 9.97%, along with the right to appoint a board member to the Spain-based operator.

What are some of the reasons behind these expansions?

We see a number of factors driving operators to increase their geographic footprints, particularly in Europe.

First, there's the competitive domestic landscape to consider. With increased saturation in their mature domestic markets, with above 100% mobile penetration, GCC telecom operators are looking abroad to diversify their sources of revenue--which has converged to single-digit growth compared with double-digits historically. Despite low single-digit revenue growth for European telecoms (we forecast about 2% on average) we think these expansions would add scale to GCC operators, as well as offer low country risk and potentially grow cash flows as telcos' capital expenditure needs in Europe decline.

Chart 1

Chart 2

There is also currency hedging. GCC operators' international portfolios are exposed to countries with elevated country risk and currency volatility (Egypt, Pakistan, most sub-Saharan African countries), which offsets some local currency growth prospects. As a result, increasing their activities in Europe, where country risk is low and euro fluctuations are reasonably contained, should provide a currency hedge against other markets.

Chart 3

Despite European markets growing more slowly than GCC markets, particularly given the better competitive environments and faster population growth in the latter, we think these expansions should help cash flow growth for GCC operators, depending on the transaction, as follows:

• Full consolidation: In some cases, such as e&'s transaction with e& PPF, the company will fully consolidate the group, and as a result achieve meaningful revenue and EBITDA growth.
• Equity method: When the company accounts for investments under the equity method (example e& with Vodafone previously), our S&P Global Ratings-adjusted EBITDA would benefit from cash dividends received from investments accounted for under the equity method.
• Dividend income: In other cases, such as financial investments (stc with Telefonica), the operator would benefit from dividend income.

Chart 4

How have the international markets responded?

They have been somewhat cautious. We have seen some reluctance and delayed approvals from European regulators, mainly to protect strategic infrastructure, rather than due to competition concerns. Notably, following stc's announcement of its 5% Telefónica acquisition, with derivative interests taking it to 10%, the Spanish Council of Ministers and Board of Foreign Investments reviewed the purchase. As an approval condition, stc accepted requirements to maintain Telefónica's operational autonomy and protect critical infrastructure, and the Spanish state investment firm, Sepi, took a balancing stake in Telefonica at 10% to provide "shareholding stability". Shortly after, CriteriaCaixa, the holding company that manages "la Caixa" Foundation's business assets also increased its stake to 10%.

In the case of e&, it signed a binding agreement with PPF Group in August 2023 to acquire the 50% + 1 stake in the service and infrastructure companies of e& PPF Telecom Group's assets in Bulgaria, Hungary, Serbia, and Slovakia, subject to regulatory approvals. Subsequently, in June 2024, the European Commission announced it had opened an investigation into assessing the transaction under the Foreign Subsidies Regulation. In September 2024, e& announced that it had received the European Commission's approval to complete the transaction, and did so in October 2024.

In terms of investor sentiment, following announcements of acquisitions there has been no meaningful impact on share price movement (see chart 5).

Chart 5

Have any ratings been affected?

For GCC telcos, our ratings analysis typically focuses on how such investments impact the buyer's leverage, financial policy, and overall strategy. For the GCC operators, their financial profiles and policies have not materially changed. Strategically, we expect the domestic and regional markets to remain the principal contributors to cash flows given their competitive landscapes and favorable demographics. At the same time, we see these acquisitions as an effort to diversify and increase scalability. Impacts on business profiles have also been muted given the financial nature of the investments. In the case of e&'s PPF acquisition, while we incorporate a 15%-20% boost to revenue and EBITDA from 2025, we continue to expect domestic operations to support profitability margins and reduce volatility in the international portfolio. As a result, our view of e&'s business profile remains unchanged.

For the target entities, we assess whether the ownership structure is changing materially and whether there could be ratings uplift or capping in the context of group considerations. Operationally, we would only see an impact to the extent that there is oversight on the board and decision-making controls over strategy, or if we see increased integration between the entities. So far, this has generally not been the case. The exception is e&'s acquisition of the PPF assets. In October 2024, following the completion of this transaction, we raised our long-term issuer credit rating on e& PPF and its senior unsecured debt to 'BBB-' from 'BB+'.

Have there been any meaningful domestic transactions in the telecom sector?

Yes, but they have been more focused on adjacencies rather than pure play telecom service offerings.

In particular, we note an increasing interest in data centers as a way of leveraging the demand for hyperconnectivity, AI, and cloud services. Ooredoo repeatedly highlights interest in modernizing and expanding its data center activities, with Ooredoo and stc announcing separate plans to invest $1 billion each in data centers over the next few years.

e& life and e& enterprise's contribution remains marginal compared with the telecom segment's revenue and EBITDA, although we note that the company has been expanding through acquisitions. e& enterprise consolidated Careem Technologies, benefiting its fintech performance.

In Saudi Arabia there is a push to consolidate the country's towers under a single entity. In December 2024, stc announced that it had completed the sale of its 51% stake in TAWAL (its tower subsidiary) to the Public Investment Fund (PIF) for a cash consideration. PIF then completed the transfer of its 51% ownership of TAWAL and its stake in Golden Lattice Investment Company (GLIC)--the latter owned by PIF, Sultan Holding Company, and HRH Prince Saud Bin Fahad bin Abdulaziz, and in charge of about 8,000 telecommunication towers in Saudi Arabia--to a new entity. The newly formed entity will be owned by PIF (53.99%), stc (43.06%), HRH Prince Saud Bin Fahad bin Abdulaziz (1.48%), and Sultan Holding Company (1.48%), and will own and manage a portfolio of about 30,000 towers across five countries.

Why haven't our ratings on the targeted telcos improved, following these transactions?

The majority of the transactions are focused on financial investments or equity method consolidation, with the exception of the PPF acquisition. As a result, we haven't seen meaningful reasons to factor in additional support or uplift from these transactions in a way that would positively impact the creditworthiness of the targeted entities. We note specifically the lack of control and strategic importance, or explicit financial guarantees or cross defaults, as factors in our decisions not to ascribe ratings support.

Under what circumstances might we see a credit rating impact for GCC telcos and international targets?

From a buyer's standpoint, while we see narrowing headroom under the current rating levels, the GCC operators benefit from solid balance sheet positions and strong credit metrics that should help absorb these incremental investments. All else being equal, any sustainable deviation from the rating thresholds could consequently impact financial risk tolerances or financial policy, which in turn could negatively pressure creditworthiness. But this is not our base case for now.

For the international targets, we would consider incorporating group uplift from the owner if we see the transaction as meaningful to the parent's overall strategy, if there is control or consolidation by the parent, or if there are explicit means of support provided, to the extent there is potential for some support from a higher group credit profile.

Related Research

• Industry Credit Outlook 2025: Telecommunications - Stronger signals for the sector, Jan. 14, 2025
• Country Risk Assessments Update: December 2024, Dec. 18, 2024
• Emirates Telecommunications Group Co. PJSC 'AA-' Ratings Affirmed After Acquisition Of e& PPF Telecom; Outlook Stable, Oct. 24, 2024
• PPF Telecom Group B.V. Upgraded To 'BBB-' On Majority Stake Acquisition By e&; Outlook Stable, Oct. 24, 2024
• Saudi Telecom Co., July 25, 2024
• Saudi Telecom Co. Has Sufficient Headroom For 9.9% Telefonica Stake Acquisition, Sept. 7, 2023
• e&'s Leverage Remains Well Below Threshold For The Rating After Debt-Funded Acquisition Of Vodafone Stake, May 18, 2022