Saudi Telecom reportedly eyes up Vodafone Portugal

Vodafone and Saudi Telecom (STC) have both recently failed in Portuguese M&A attempts, so it makes sense that they might now look to hammer out a deal between them. But it seems we're not close to a deal just yet.

Jornal Económico late last week reported that STC is being advised by market experts to look into a move for Vodafone Portugal, without naming its sources. Vodafone Portugal declined to comment and the paper was unable to make contact with STC.

Nonetheless, the story is pretty credible. Less than a fortnight ago Portuguese competition regulator the Autoridade da Concorrencia (AdC) did what we all knew it was planning to do and blocked Vodafone's bid to buy smaller rival Nowo.

The merger, had it happened, would have helped Vodafone to bulk up in Portugal, albeit by only a few percentage points of market share in both fixed and mobile. The fact that the watchdog expressed concerns over the competitive impact of losing such a small player from the market suggests that there are not many options left for Vodafone to inorganically raise its third-placed standing in the market.

Vodafone claims a quarter of Portugal's mobile market, according to Q1 data from regulator Anacom, behind leader Meo, which has 42%, and Nos with just shy of 30%, although the market shares even out a bit when M2M is taken out of the equation. When it comes to fixed accesses, Vodafone is even further adrift, claiming a market share of less than 20% to Meo's 45% and 32% for Nos.

With those figures in mind, in addition to the blocked Nowo sale, Vodafone clearly has a tough decision to make in Portugal. Pulling out of the market altogether is one option – we have just seen it do exactly that in Spain – and STC is certainly a strong possibility as a buyer.

The Saudi incumbent began its Iberian adventure in a different way, picking up a stake of 9.9% in Telefonica; it holds 4.9% of the telco's shares, plus another 5% in derivatives that it could convert into voting shares, if it secured the permission of the Spanish government to do so. A move for a full takeover of the Spanish incumbent seems highly unlikely. The mere presence of STC in Telefonica's shareholder list was enough to spur the Spanish government into picking up shares of its own; it outlined a plan to acquire 10%, completing the purchases in May.

Nonetheless, STC appeared keen to increase its Iberian footprint, and was closely linked with the acquisition of Portuguese market leader Meo. The company, formerly known as Portugal Telecom, is owned by Altice, which is in the midst of a spate of asset sales as it works to reduce debt. STC emerged as the preferred bidder for Meo, having been listed alongside fellow telco Iliad and a number of financial investors, as a possible buyer.

But earlier this month Portugal's Eco reported that the much-discussed deal was dead in the water, citing differences over valuation. We had been talking about a deal that would give Altice Portugal – which comprises a number of assets, including Meo – an enterprise value of around €8 billion. Essentially, it seems that Altice owned Patrick Drahi wants more for the business than the various suitors are willing to pay; the paper points to a €6.7 billion offer from Warburg Pincus earlier this year. And now the market is waiting to see what Drahi's next move will be.

In the meantime, STC could well decide that it is not willing to wait in the wings and take the advice it is apparently being given: to look at Vodafone Portugal instead.

We don't know whether Vodafone is looking to sell out of Portugal, but it will surely consider a sensible offer.