Telecom M&A: how the rise of national protectionism may prove challenging for deals in 2018

By Francesco Liberatore, Partner, Squire Patton Boggs, who will be chairing the Telecom M&A Strategies Breakout Session at the TMT Finance World Congress 2017, in London on Nov 29th, 2017.

The collision between business interests and political interests is increasingly prevalent in cross-border mergers and acquisitions, particularly in the telecommunications sector where large-scale M&A transactions have been a mainstay for many years. In the past decade, the industry has spent trillions of dollars on M&A activities, which has transformed the landscape into today’s competitive playing field. With populism on the rise in developed markets, greater regulatory scrutiny particularly in Europe, the complications of Brexit, and political instability in a number of developing markets, one of the major trends over the next few years is sure to be the political impact that will play out in telecoms M&A and investment.

With the surge of big-ticket M&A activity beginning at the end of 2013, politics have played out in the United States primarily under the pretext of a fiscal issue. American politicians have voiced concerns about so-called "inversion" transactions in which large U.S. corporate buyers have relocated their tax domiciles from the U.S. to more tax-friendly countries like Ireland and England. This has been particularly true over the last year under the Trump administration and with Congressional discussions of overhauling the American tax system.

At the same time, as the EU economy has begun to stabilize after the financial crisis, European companies have increasingly become the targets of large, sometimes hostile takeover bids by non-EU headquartered companies. This takeover attempts has raised national political issues in those countries who see their domestic industries, some of which that were previously publicly owned, as being swallowed up by foreign companies.

The telecommunications sector is perfect demonstration of this, with special rules currently in force or being introduced that are aimed at reviewing the national security aspects of foreign take-overs of local telecoms assets. This is not only in the EU but also in other jurisdictions such as China and India. This has been true in the U.S. for some time under the scrutiny of the Committee on Foreign Investment in the United States (CFIUS), where telecoms was designated as critical infrastructure and all foreign acquisitions in this sector were carefully monitored.

A recent transaction has reignited the debate regarding protectionist measures against attempted at foreign takeovers - SoftBank’s acquisition of ARM in the UK. Commentators noted that Softbank had foreseen the protectionist tendencies on the rise in the UK with the Brexit debate and swooped in to takeover ARM while they still could. 

The public interest test of this type in the UK is likely to be opposed by the European Commission as being contrary to EU merger control law and the EU internal market principles. These prohibit most measures that would prevent or restrict the free movement of services, goods, people and capital or the freedom of establishment within the EU. However, post-Brexit such constraints on UK national protectionist measures might fall away. There have been a number of indications that Brexit is likely to lead to evermore intervention based on political objectives by UK competition agencies, but only time will tell how this will play out in practice.

The complexity of the industry and adjacent sectors has further complicated the picture of how national interests might play into M&A trends. Carriers are spreading into other business markets, such as content – the so-called vertical or converged mergers. In the past, such deals raised fewer competition issues with regulators. However, public interest issues, such as media plurality, may be relevant as we have seen in recent UK intervention by the UK Secretary of State for Digital, Culture, Media and Sport.

Therefore, while politicians debate how best to protect so-called “national champion” businesses from foreign takeovers, a threshold question in respect of takeovers of EU-based companies is whether national governments actually have the power to do so in light of well-established EU legal principles and whether that threshold might change post-Brexit for UK critical telecoms infrastructure and media assets. Future M&A deals in the sector will need a strategic combination of public policy, M&A and regulatory advice to avoid potential delays in closing and political intervention.

Contact the author:  

Francesco Liberatore
Squire Patton Boggs
Tel: +44 (0)207 655 1505