Buyouts: More trouble in Taiwan

Does Taiwan want to cultivate a private equity industry with meaningful international participation? Following the collapse of Morgan Stanley Private Equity Asia (MSPEA) and Far EasTone Telecommunications’ bid for cable TV operator China Network Systems (CNS) – which would have allowed MBK Partners to exit – this question is once again left hanging. For all the government’s public affirmations that foreign financial investors are welcome, it hasn’t worked out that way in practice.

It should be noted that the CNS deal didn’t fail specifically because of private equity involvement, but its fate underlines the difficulties facing many PE investors. The government, political parties and the military are barred from investing in media companies, and so Far EasTone – a NT$234 billion ($7.5 billion) business in which some government pension funds have a very small stake – could not directly own CNS. Therefore, MSPEA agreed to buy it for $2.3 billion, including around $1.6 billion in debt, and then issue a bond of up to NT$17.12 billion to Far EasTone. Should the regulations change, Far EasTone’s debt could be converted to equity.

The transaction was approved by Taiwan’s Fair Trade Commission and the National Communications Commission (NCC) in late 2015 and early 2016. However, following a general election, the arrival of a new administration, and calls from numerous politicians for a second review, the Investment Commission under the Ministry of Economic Affairs asked the NCC to reconsider certain elements of the deal. Recognizing they were at an impasse, the parties involved decided to terminate the transaction.

Both CNS and Far EasTone expressed dissatisfaction with the approvals process, noting the disruption caused by the change in government as well as repeated rumors surrounding the case. Far EasTone also went further, criticizing the regulatory regime for limiting the development of the media industry and the digital economy, and highlighting two past instances in which Taiwan conglomerates – also large enough to count government pension funds among their investors – found a way around the rules and were not held back.

Each saw the members of families that control conglomerates make media acquisitions in a private capacity: In 2010, the Tsai family, which owns Fubon Financial Group, acquired Kbro from The Carlyle Group, bringing to a close a holding period that had seen a previous attempt to sell to Taiwan Mobile blocked; and last year the vice chairman of Hon Hai Group agreed to buy Taiwan Broadband Communications, which had listed in Singapore (as a trust) in 2013 because PE owner Macquarie struggled to find a conventional trade buyer.

The spike in Taiwan buyouts in 2006-2007 was driven by six investments in banks and five in cable television. Given the roadblocks encountered when trying to exit these assets – MBK previously reached agreements with two buyers for CNS only to see the deals fall through – and the structural gymnastics required to navigate them, it is unlikely to be repeated. What private equity firm would want to own a company when the only groups large enough to buy it at the end of the holding period are unable to do so for various regulatory reasons?

Although the conditions surrounding CNS are particular to media, regulation has long been a sticking point for larger GPs looking to buy assets in Taiwan almost irrespective of sector. Take-private deals have attracted the most attention: several PE-backed transactions have been delayed and then either abandoned or blocked, with the government giving fuzzy explanations about protecting minority shareholders’ rights. Amid concerns that private equity is basically unwelcome, annual investment has duly flat-lined, averaging $277 million over the last six years following a peak at $4.8 billion in 2007.

The common complaint is that investors don’t know where they stand. “We expect the Taiwan government to provide a more transparent and predictable foreign investment environment in the future,” Far EasTone observed, a remark that could have been made on behalf of the entire private equity industry.

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• Topics
• Greater China
• Regulation
• Buyouts
• Taiwan (China)
• Morgan Stanley Private Equity Asia
• MBK Partners