The Saudi sovereign wealth fund  the Public Investment Fund’s nonbinding offer to acquire 51% of Saudi Telecom Co.'s (STC) fully owned towers subsidiary Tawal is credit neutral as the divestment will have limited effect on STC’s financials.

The divestment, part of STC’s strategy to monetize its assets, follows earlier deals such as the listing 20% of the technology company STC Solutions in September 2021 and the sale of a 15% stake in Saudi's first licensed digital bank STC Pay in December 2020. The company also established an internet of things (IoT) joint venture with the PIF (unrated), it's main shareholder, earlier in 2022.

Tawal owns and operates more than 15,500 towers (4G and 5G) in Saudi Arabia and had plans to acquire Pakistani tower company AWAL earlier this year. Tawal is valued at more than 21 billion riyals ($5.8 billion), "implying proceeds from a 51% stake of about SAR11 billion for STC".

It generates most revenue and profits from STC, which are eliminated following the divestment. While there is no financial debt and limited cash at Tawal, S&P expects a moderate but not meaningful reduction in consolidated capital expenditure (capex) following the deconsolidation. This is because it estimates that 5G investments will normalize in the future, given those already undertaken and STC's focus will increasingly shift to investments in digital services, resulting in a more asset-light business.

In S&P’s view, STC will likely redeploy a large portion of the sale proceeds into its operations over time to develop various noncore services. "Therefore, they assume only a temporary, but not sustainable, increase in cash balances, while a significant increase in profits from non-telecom businesses will take several years to materialize."

The ratings agency profit contribution from non-telecom services could gradually increase to about 20% over the next three years, from an estimated 10%-15% currently.

(Writing by Brinda Darasha; editing by Seban Scaria)