By Andres Gonzalez, Amy-Jo Crowley, Pablo Mayo Cerqueiro and Hadeel Al Sayegh
LONDON/DUBAI (Reuters) - Saudi Arabia's STC Group has amassed a 9.9% stake in Telefonica (NYSE:TEF) worth 2.1 billion euros ($2.25 billion), in a move to become the Spanish telecom giant's top shareholder.
STC, the kingdom's largest telecoms operator, unveiled the investment on Tuesday after market hours. The holding consists of 4.9% of Telefonica's shares and financial instruments that give it another 5% in so-called economic exposure to the company.
STC plans to secure voting rights for that 5% interest held through financial instruments after receiving regulatory approvals, the company said.
We "see this as a compelling investment opportunity to use our strong balance sheet whilst maintaining our dividend policy," STC CEO Olayan Alwetaid said in a statement, adding it doesn't intend to acquire "control or a majority stake".
Telefonica said it was informed of STC's investment on Tuesday, describing it as "friendly".
STC built the position with the help of U.S. investment bank Morgan Stanley, two sources familiar with the situation told Reuters.
Linklaters acted as legal adviser to STC and Allen & Overy acted for Morgan Stanley, they added.
Morgan Stanley, Linklaters and Allen & Overy declined to comment.
Telefonica's shares were up 2.9% as of 0725 GMT in Madrid at 3.86 euros.
Shares of STC were little changed, up 0.1% to 39.60 riyals ($10.56) at market open in Riyadh.
STC is Saudi Arabia's largest telecoms operator and also owns subsidiaries and has stakes in companies operating in Kuwait and Bahrain.
It is 64% owned by Saudi Arabia's Public Investment Fund (PIF), the main engine of Crown Prince Mohammed bin Salman's Vision 2030 to wean the economy off its dependence on oil.
Gulf telecom groups are ramping up investments abroad, with Emirates Telecommunications Group, known as e&, in March raising its stake in Vodafone Group (LON:VOD) to 14%.
For STC, the Telefonica investment is its second foray into Europe's telecoms market having agreed to buy tower infrastructure worth 1.2 billion euros from United Group in April.
Telefonica is set to present a new strategic plan on Nov. 8 with a focus on growing the company's free cash flow, which its CEO has said could reach 4 billion euros this year.
Telefonica, like rivals in Europe, has faced a squeeze on profitability from cut-throat competition and the need for hefty investment in infrastructure for the 5G next-generation mobile technology. It has been selling stakes in more mature businesses such as submarine cables or mobile masts to fund 5G and optic fibre.
Telefonica shares closed at 3.75 euros on Tuesday, giving it a market capitalisation of around 22 billion euros. The company was worth more than 110 billion euros when it hit a previous peak in 2008.
Spanish bank BBVA (BME:BBVA) was Telefonica's largest shareholder as of last year with a 4.9% holding.
($1 = 3.7509 riyals)