Background on Key Players
Telefónica, a prominent Spanish telecommunications company, has experienced a decline in its stock price, causing losses for Morgan Stanley’s hedging agreement with the Saudi telecom firm, Saudi Telecom Company (STC).
Telefónica: A leading Spanish telecommunications provider with a significant presence in Europe and Latin America. The company offers mobile, broadband, and fixed-line services to millions of customers.
Morgan Stanley: A global financial services corporation based in New York City, providing investment banking, securities, wealth management, and investment services to individuals, governments, and corporations.
Saudi Telecom Company (STC): The largest telecommunications company in the Middle East, offering a wide range of services including mobile, fixed-line, and internet services to customers in Saudi Arabia.
The Hedging Agreement and Its Implications
Morgan Stanley entered into a hedging agreement with STC, covering the price risk of its 9.97% stake in Telefónica. The reference price for this derivative contract is set at $4.32 per Telefónica share.
However, the current stock price of Telefónica stands at $4.19 following a dividend cut, placing Morgan Stanley “underwater.” This means that if the options were to be executed, Morgan Stanley would need to compensate STC.
- Options Execution Timeline: The options cannot be executed until March 2026, giving Telefónica’s stock ample time to potentially recover.
- Risk Coverage: It is reasonable to assume that Morgan Stanley has hedged its risk with other brokers, mitigating potential losses.
- Compensation Mechanism: If Telefónica’s stock price exceeds $4.32, STC would receive compensation from Morgan Stanley. Conversely, if the stock price falls below $4.32—as it currently does—Morgan Stanley would need to compensate STC, with the option of settling in Telefónica shares.
- Current Losses: With the current stock price and considering the options’ impact on 650 million Telefónica shares, Morgan Stanley would owe STC approximately $71 million if all options were executed.
Government Intervention and Its Consequences
In response to STC’s surprise entry into Telefónica in 2023—brokered by Morgan Stanley—the Spanish government delayed more than a year before allowing STC to hold over 5% of Telefónica’s shares.
Furthermore, the government ordered the Spanish Securities Market Commission (SEPI) to purchase a 10% stake in Telefónica, executed at $4.61 per share, resulting in latent losses for SEPI and CriteriaCaixa.
CriteriaCaixa: A Catalan holding company that increased its Telefónica stake to nearly 10% with a price-covering agreement with Goldman Sachs, which expired in April 2025. The average price paid by CriteriaCaixa for its Telefónica shares is $5.
Key Questions and Answers
- What is the current situation? Telefónica’s stock price has dropped to $4.19, causing Morgan Stanley to be “underwater” in its hedging agreement with STC.
- When can the options in the hedging agreement be executed? The options cannot be executed until March 2026.
- What are the potential consequences if options are executed? If Telefónica’s stock price is above $4.32, Morgan Stanley must compensate STC; if below, STC receives compensation from Morgan Stanley.
- How did the Spanish government respond to STC’s entry into Telefónica? The government delayed allowing STC to hold over 5% of Telefónica’s shares and ordered SEPI to purchase a 10% stake in Telefónica, both at a higher price than the current market value.
- What is CriteriaCaixa’s involvement in Telefónica? CriteriaCaixa increased its Telefónica stake to nearly 10% and had a price-covering agreement with Goldman Sachs, which expired in April 2025.
