U.K. worries over UAE operator’s stake in Vodafone

In May 2022, Emirates Telecommunications Group Company, now more commonly known as e& (or formerly Etisalat), caused something of a stir when it acquired a 9.8% stake in Vodafone Group at a cost of $4.4 billion.

The UAE-based group framed the deal as part of its wider ambition to expand into new markets and related areas such as financial technology. At the time, e& provided assurances that it did not intend to make an offer for Vodafone, and nor was it seeking board membership.

Over subsequent months, the group then proceeded to gradually buy more shares in Vodafone, and now owns 14.6% of the U.K. group. What’s more, e& has expressed interest in increasing its stake further to up to 25%.

As things stand, Vodafone’s leadership has made broadly positive noises about e&, even forming a strategic relationship with e& in May 2023 that covers areas such as enterprise, procurement, wholesale, roaming and open RAN developments. As part of this agreement, Hatem Dowidar, group CEO of e&, also joined the Vodafone board as a non-executive director.

However, it appears that the U.K. government has become increasingly concerned about the close relationship between Vodafone and e&, probably not least because the UAE government owns 60% of e&.

In a statement published late on Wednesday by Oliver Dowden, secretary of state at the Cabinet Office, the government described the stake held by e& as a national security risk and ordered the companies to take steps to mitigate it.

According to the Financial Times, the government had not previously disclosed that it was reviewing the relationship between Vodafone and e&. As the paper noted, under the National Security and Investment Act, which came into force in 2022, the government is able to review foreign takeovers of companies in industries that have ties to national security.

National security concerns

According to the government statement, the acquisition by e& of a stake in Vodafone is a problem for a number of reasons.

For example, it says Vodafone supports “domestic and international initiatives in the telecommunications sector,” contributes towards “ensuring U.K. cyber security,” and acts as a strategic supplier of services to many parts of central government, “including services provided to U.K. government departments which are in support of national security.”

The so-called “final order” issued by the government now requires both companies to meet certain requirements relating to any alteration or termination of the terms of their strategic relationship.

The two groups also have to establish a “national security committee” to oversee any work by Vodafone that “has an impact on or is in respect of the national security of the United Kingdom.”

Vodafone did not respond to a request for comment before publication. However, it appears to be sending a stock quote to U.K. newspapers, saying: “We are pleased to have received clearance in our home market for our strategic relationship agreement with e&, and for e& to take a seat on our board.”

Meanwhile, the U.K. is not the only European nation to have raised concerns over investments in key telecom operators by a state-owned operator in the Middle East.

For instance, the Spanish government recently signaled its intention to take a share of up to 10% in Telefónica Group in order to balance Saudi interests in the operator. stc Group acquired a minority stake in the former Spanish incumbent in September. The Saudi operator currently owns a 4.9% stake, and is set to increase this to 9.9% should it receive regulatory approval.