Tokyo talk

The last few months were inundated with talk of Tokyo-based operator Softbank’s bold $20.1 billion proposed acquisition of a 70 percent stake in U.S. carrier Sprint Nextel; the largest outbound acquisition by a Japanese company to date. “This deal is a very good illustration of the growing ambitions of Asian telecom players to enter foreign markets,” says Graeme Preston, partner at Herbert Smith Freehills’ Tokyo office, “In Japan especially, the slow domestic market and strong yen has meant that a number of Japanese companies are now sitting on large cash piles and naturally are looking at ways to spend this money on investments overseas.”

Ken Siegel, managing partner of Morrison & Foerster’s Tokyo office and adviser to Softbank, further elaborates that this transaction represents the globalisation of telecoms as well as the ongoing interest of Japanese companies to seek growth in non-Japanese markets.  Myanmar, India, and Indonesia in particular have attracted their attention in addition to the U.S. Takeshi Nakao, partner at Tokyo  Freshfields, says: “The U.S. is a very attractive market for Japanese clients, as companies feel that it’s a safe and stable jurisdiction where you can expect steady growth in the domestic market.”

Japan outbound investment is clearly a trend that is expected to continue strongly into 2013. However, lawyers indicate to the extent that there are further acquisitions or expansions by telecom operators within or outside Asia, the scale will be much less than Softbank’s proposed acquisition. But it will likely have a knock-on effect in terms of pushing competitors to also undertake deals showcasing their international ambitions. For example, Rob Bratby, Asia managing partner at Olswang, says: “Singtel is also doing smaller acquisitions in the mobile advertising space. They have done a number of acquisitions this year to add or enhance capability, which favourably compares to a lot of the European and U.S. telcos, who are finding themselves more financially stressed.”

A strong signal for Southeast Asia

It’s undeniable that investors are very keen to get into Southeast Asia for all the obvious reasons. It is a high-growth market and although penetration rates for the region are fairly saturated, the opportunities in value-added services for the next generation of mobiles continue to attract carriers on a consistent basis.

Indonesia, in particular, is seen by many industry sources as a challenging, yet exceptionally lucrative market. Home to a complex regulatory regime, it currently has seven mobile operators, a number which many expect to see lessen in the near future. Mark Parsons, partner at Freshfields’ Hong Kong office, explains that: “You have to question whether there are too many operators here because the country opened up at a time when licences were issued with a view to achieving growth ambitions for infrastructure, which took a lot of foreign capital as it wasn’t available domestically. Now, they have to step back and see that the future is in consolidation and people buying more value-add services, adding more data on their devices.”

The region as a whole is a fiercely competitive marketplace, with operators undercutting each other, trying to build market share by offering SIM cards with discounted or free minutes. As a result, users jump from operator to operator, creating incredibly challenging economic conditions for mobile phone carriers. Cambodia, in particular, is overcrowded with nine licensed operators in a country of 15 million people. Parsons continues: “If one is sufficiently resourced to carry on for the future, it is a longer term game. So operators will try to stick it out. But you have to expect to see some consolidation in Vietnam and Cambodia where it is long overdue, but especially in Indonesia which is considered a real jewel in the crown.” These high levels of competition have already propelled several consolidation moves, most notably that of Sampoerna Telekomunikasi Indonesia acquiring a 10 percent stake in fourth-largest mobile carrier Bakrie Telecom as part of a share swap deal between the two CDMA mobile operators. Industry sources indicate that this deal is meant to enable Bakrie Telecom to scale quickly as competition increases in the mobile data market.

On consolidation, Michelle Chan, partner at Herbert Smith Freehills’ Hong Kong office, agrees: “We have been seeing a number of non-Asian operators and investors withdrawing from the Asia market, notably Etisalat's sale of its interest in XL Axiata, Telefonica's partial sale of its stake in China Unicom, and Vimpelcom's proposed sale of its operation in Cambodia and Laos.”

Hopping over to Thailand, telecom activity remains high, yet of a different nature. The country has just completed 3G auctions; a somewhat controversial process attracting public criticism from special interest groups, however overall a step forward for Thai telecoms with 4G services promised by 2013. Bratby says: “The push from governments across the region to stimulate communications investment and as part of that, ensuring that sufficient spectrum is available means that we are seeing a round of auctions in various jurisdictions. Following the auctions, the operators are refreshing and upgrading their technology to meet consumer demand for faster mobile data, which in turn is driven by smartphone adoption.” Clearly, on the legal front, there is no dearth of activity when it comes to telecoms in Asia as the market continues robustly into the next year.

India’s telecom drama rages on

Chaos reigned supreme in the telecom sector this year, as the already-battered industry reeled from government indecision, lengthy delays, and one high-profile resignation. A quick recap of the saga so far; a Supreme Court order cancelled more than 100 telecom licences earlier this year, citing that the first-come, first-serve policy that they were handed out under in 2008 was illegal. The government then took back the airwaves allotted under those confiscated licences and reauctioned them. Several companies whose licences were cancelled elected to opt out of India entirely. But for those that remained, rebidding was compulsory, albeit at a much more expensive price, reducing the field to only five players - Telenor, Vodafone, Bharti Airtel, Idea Cellular and Videocon.

The second auction, conducted in November, generated a paltry 94 billion rupees, just a third of the government’s target of 280 billion rupees, and significantly less than 2010’s auction, which saw the nation’s coffers rake in $1.2 billion. Putting up 144 blocks of spectrum for sale, the most recent auction only attracted bids for 101 of them, as the high starting price meant there were few to no bidders for some service areas.

“There have been several fundamental changes to the way in which the telecom industry works and will work in the future,” says Rahul Matthan, founder partner of Trilegal, “biggest of which is the price which telecom companies will have to pay for spectrum, which will reflect in the price that consumers pay. But now with the auction and all the various issues that are being raised in relation to the price of spectrum, the marketplace is going to be very different to what we are used to. It’s unclear how it’s going to pan out, but people will be approaching this in a very different way.”

Industry sources indicate that the increase in prices has already begun, as operators raise tariffs and the number of subscribers slows down. S.P. Purwar, partner at J. Sagar Associates, says: “This summer, the total number of mobile subscribers in the country was in decline; the first time it had happened since the new licences were given.” Low tariffs have been the main drivers of telecom growth in India for the last few years, and “and if the prices go up, many marginal subscribers will certainly fall out of the system,” continues Purwar.

Lawyers have careened in tandem with the industry, initially advising companies with the fall-out of the 2G scam, then counselling the existing players on how to continue with their corporate ambitions, to now dealing with a very complex and unpredictable regulatory environment.

Matthan says: “We have been busy putting together a strategy for how to go forward. This is quite an abnormal situation in that this is not something one would face in a regular telecoms practice; the quashing of 122 licences is quite unprecedented.” Looking ahead however, he notes that there has been a sea change in the manner in which telecoms will be regulated, with a knock-on effect on M&A and valuations. “We will start to see different questions being asked because companies will be looking to try various measures to bring their costs down,” he concludes.

The less-than-satisfactory November auction has led the government to announce that a third round will be held before the fiscal year is over in March 2013. Profits from the sale of spectrum are critical for the administration to keep its budget deficit within its target of 5.3 percent of gross domestic product this year. “The very high base price of 14,000 crores for the auction really discouraged a lot of foreign players,” says Purwar, noting that growth in this market will now depend on policy initiatives by the government to encourage investment.

What is clear is that an erratic marketplace hasn’t done the country any favours when it comes to foreign investors. “India is chaos," says Olswang’s Bratby, “It is difficult for investors in India to understand the country risk profile and as well as telecom specific issues such as auctions and licence validity. They are also faced with wider risk factors: in particular potential retrospective tax liability, particularly in light of the Vodafone case. The challenge with India is that you are never sure what’s going to happen.”

The world’s last untapped market opens up

With President Barack Obama’s recent historic visit heralding hope for political and economic change, all eyes continue to be glued to Myanmar, as one of the world’s last remaining markets opens up for business. The telecom market is one that companies are eyeing especially hungrily, as the country has over 60 million people, but has the world’s second-lowest mobile penetration rate after North Korea.

The government is eager to attract investment, recently announcing a business-friendly foreign investment law as well as making moves to liberalise the telecom sector in particular. "We're going to finish it soon, we really cannot wait," Kyaw Soe, a senior official at the Ministry of Communications, Posts and Telegraphs, told Reuters. "It's closely related to (the) economic growth of our nation, so this is a priority sector." At the moment, the general consensus is that four operating licences will be granted - two to local companies, and the remainder up for grabs for international players. Japanese company NTT Communications has already opened a branch office in Yangon, hoping to capitalise on an early-mover advantage.

Despite telecom companies’ frenzied eagerness to enter the market, practitioners highlight a few sticking points - first of which is that the newly-written foreign investment law does not cover telecoms; that sector is still restricted under the previous foreign direct investment regime, so industry-specific regulations need to be implemented under the new law or a law specifically dedicated to telecoms should be enacted to provide clarity. “Clients are asking us what and how many licences will be made available, will there be limits, will we have to do it as joint ventures or can we do it alone, and at the moment, we don’t have answers to those questions,” says Freshfields’ Parsons. “They are trying to move very quickly, but you have to factor in the broader uncertainty in Myanmar itself.”

Lawyers reveal that earlier this year, the government indicated that it would issue licences even without a telecom law in play, adding a whole new level of risk for foreign investors. Telecom  laws generally detail what obligations operators are under to connect with each other, tariff regulation(s), as well as industry regulations. Most foreign entrants to the market, especially one as nascent and unregulated as Myanmar, would want that law in place prior to entering, according to industry sources.

Despite the massive opportunities in a country with only two to three million mobile services users, the marketplace is undeniably tough, especially when it comes to gauging risk. If a company were to obtain an operating licence, commitments would include building a certain number of mobile phone towers per year and achieving a specified penetration rate annually. Operators would be under a lot of pressure to invest real money; a dicey proposition if the regulatory environment is still so unclear.

Parsons advocates that interested clients, “exercise caution even when the new regime comes down, read carefully through the new legislation, access contacts in the ministries to engage with them and to understand how they are going to be applying the new law and interpreting the new licences.”

One trend that the rush to enter Myanmar clearly illustrates is that of inter-regional investment. From Japan to China to Singapore, operators are chomping at the bit to get a piece of the action. Olswang’s Bratby says: “We are more likely to find that the first investors will be regional players who are more used to dealing and operating in jurisdictions where the risk profile is different and where the rule of law is a little weaker.”

It’s also not just the big-name players; smaller, regional companies are also interested. Dhiraphol Suwanprateep, partner at Baker & McKenzie, reveals that: “As our neighbouring country, a large number of Thai investors are interested, telecom operators included. But companies that want to enter will have to start gathering their resources now.” A view that is echoed by many - that the risks may be plentiful, but if you don’t start your engines now, the opportunity may be lost.

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