Flush with cash, GCC telecoms operators are taking advantage of depressed valuations among international players and investing in telecommunications companies within Europe, and potentially in Africa and Asia.

In a new report, Moody's Investor Service said these "investments could be credit supportive in the long term but the benefits will depend on the balance between the maturity and growth potential of new geographies".

Emirates Telecommunications Group Co PJSC (e&) has accumulated a 14.6% stake in Vodafone Group PLC and has agreed to buy international assets of PPF Telecom Group B.V.

Saudi Telecom Company (STC) acquired a 9.9% stake in Telefonica S.A. and its tower subsidiary TAWAL acquired some tower assets in Eastern Europe.

Moody's said Europe is likely to be the primary region for expansion as it complements the GCC companies' existing footprint and provides for diversification into more developed jurisdictions.

"However, European governments will be cautious in approving acquisitions of strategic telecom assets by foreign investors. This makes the acquisition of sizeable minority shareholdings a potentially attractive option," Moody's analyst Mikhail Shipilov and others said in the report.

Digital services

GCC operators are investing in digital consumer services and tech enterprise solutions in parallel with their expansion into new markets. "These are complementary to their core connectivity offering and leverage the existing customer base while diversifying from their traditional telecom businesses."

This expansion of products and services should support further business growth. "We expect the GCC telecoms operators' annual revenue to increase by 3% on average in 2023-24," said Moody's.

The GCC telecoms operators are also divesting tower infrastructure "which should unlock finance and efficiency savings". Higher valuation multiples for tower infrastructure than for telecoms operators create a financial arbitrage opportunity. While such divestment should bring operational benefits and help unlock the monetary value of the assets, high interest rates, inflationary pressure and increased complexity could weigh on the expected benefits, the ratings agency warned.

The regional operators are well-positioned for further investment and M&A activity thanks to their strong credit quality, sound credit metrics, robust balance sheets and sizeable cash buffers.

Dubai's Emirates Integrated Telecommunications Company (Du) on Monday reported a 60% increase in its Q3 2023 net profit to $137 million, on rising revenue. STC, the Saudi kingdom's biggest mobile operator, reported a 38% jump in profit to $1.31 billion in Q3. 

While e& is yet to report earnings for the latest quarter,' its Q2 profit rose to hit $686.2 million.

(Reporting by Brinda Darasha; editing by Seban Scaria)