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(Bloomberg) — Spain is considering whether to shield its “most strategic” company from foreign takeovers in what could be the the government’s most significant protectionist move in more than a decade. 

In an announcement Tuesday, the government’s corporate holding firm said it would undertake an “exploratory analysis” of a potential stake acquisition in Madrid-based telecom Telefonica SA. The statement came a day after it was reported that Spain was weighing a 5% stake in the carrier, and nearly two months after state-controlled Saudi Arabia Telecom announced plans to buy 9.9% of Telefonica SA. 

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Should Spain pursue the acquisition, it would limit the power of Saudi Arabia Telecom within the company.

The potential measure would mark a major shift for the Spanish government, which traditionally has been wary of intervening in the private sector. Even as many European countries have sought to move critical supply chains closer to home and ensure control over strategic industries in the wake of pandemic-related volatility and Russia’s invasion of Ukraine, Spain stands out in not having blocked major deals nor engaged in significant corporate rescues in recent years.

European leaders have been most uneasy about Chinese investment in the EU, but the growing presence of Middle Eastern money within the bloc is also starting to attract more scrutiny. In recent years, Gulf states have encouraged government-backed firms to diversify their holdings via international deals in sectors such as sports, healthcare and renewable energies. 

Even though Spain and Saudi Arabia have long-standing diplomatic and trade relationships – Spain is a major arms supplier to the Gulf state – news of the Saudi Arabia Telecom investment prompted a backlash in Madrid from politicians across the political spectrum. 

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To be fair, a few Spanish firms already have large Gulf investors. Qatar is the largest shareholder in the Iberdrola SA utility, and a key shareholder in International Consolidated Airlines Group SA, the parent company of Iberia airlines. But Telefonica is different. 

The carrier “is one of the most, if not the most strategic company in Spain,” Economy Minister Nadia Calvino said earlier this month, adding that its importance lay “not only in the area of telecommunications but also in technologies related to defense.”  

In addition to managing key telecommunications infrastructure, the company also provides communications services to the armed and security forces. Officials are concerned that a government-controlled foreign investor could access sensitive information linked to those services should they assume a seat on the board, according to a person familiar with their discussions. 

While Spain has traditionally been more reluctant than other large EU nations to take ownership of corporations, Prime Minister Pedro Sanchez has broken with this stance. The Socialist leader favors a strong state presence in key industrial sectors such as defense, energy and technology as a way of stimulating economic activity, according to a person familiar with his mindset. In this regard, he aligns with the recent Europe-wide trend toward state intervention. 

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The government hasn’t provided any details on what it might do with a stake in Telefonica or a potential board seat. Should it go forward with the acquisition, it would join local lenders CaixaBank SA and Banco Bilbao Vizcaya Argentaria SA, which own about 8% between them, and security firm Prosegur Cia de Seguridad SA, which owns around 0.8%, among other investors.

Meanwhile, in the UK, the government has largely remained on the sidelines as the United Arab Emirates’ state-controlled telecom became the biggest shareholder in Vodafone Group Plc, the largest British telecom by market value. 

Madrid’s decision to consider buying a stake in Telefonica stake has been kept under wraps until now and executives at the company were largely kept in the dark, according to people familiar. This was the case even though Telefonica Chairman Jose Maria Alvarez-Pallete has a close relationship with Sanchez. 

Telefonica had also been unaware of Saudi Arabia Telecom’s interest until shortly before news of the acquisition was announced. Pallete had been traveling in California when he received a call from Olayan Mohammed Al Wetaid, his Saudi counterpart, several hours before the announcement, according to two people familiar with the matter. In a meeting in Riyadh two days later with Saudi Arabia Telecom CEO Al Wetad and Chairman Mohammed Bin Khaled, Pallete was assured that the new investor was only interested in long-term strategic investment rather than financial investment, according to one person familiar. 

The question now is whether Spain’s government will be supportive of that. 

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