MBK’s CNS woes underline private equity problems in Taiwan

MBK Partners has seen its sale of a 60% stake in CNS fall through again, underscoring the difficulty for private equity firms looking to exit Taiwan in the face of regulatory challenges.
MBK’s CNS woes underline private equity problems in Taiwan

Politics and red tape have scuppered the latest effort by Korean private equity firm MBK Partners to offload its majority stake in Taiwanese cable television operator China Network Systems.

Taipei-listed Far Eastone Telecommunications revealed in a statement on Wednesday that its long-stalled plan to acquire MBK's 60% stake in CNS in partnership with Morgan Stanley's private equity arm was now off the table.

The decision to scrap a deal that was first announced in July 2015 came after a new government took office last year, and asked regulators to look again at whether the purchase was in line with regulations forbidding state entities from investing in media outlets.

The failure of the deal – MBK's third attempt to sell its stake – reflects a difficult and complex regulatory environment in Taiwan which makes life particularly tough for overseas dealmakers. Mergers and acquisitions must be approved by a plethora of regulators while politics can also play a huge part, especially where the country's relations with China are concerned.

The crux of the problem in this case is the 2003 Radio and Television Act, in which the Democratic Progressive Party, which was then running the country for the first time, tried to end decades of state control over the media. The army took control of TV and radio broadcasts in 1949, giving the ruling Kuomintang control over information flow during and after the Chinese civil war.

Far Eastone does have government funds as investors, but they make up less than 5% of shareholders – and similar deals have been able to bypass the act using various structures.

Through a special-purpose vehicle under chairman Daniel Tsai, Fubon Financial acquired cable TV operator Kbro from private equity firm Carlyle in 2010. Last year, Hon Hai gained control over Taiwan Broadband Communications through a personal investment by Lu Fang-ming, a vice president of the firm.

Far Eastone had planned to ease any concerns by investing in a bond issued by a local subsidiary of Morgan Stanley's private equity arm, which in turn would own the CNS stake. The deal was initially approved by the telecoms regulator in January last year, when a Kuomintang government was in place. But, after the DPP returned to power in May, the regulator decided to look at the agreement again.

That review has not yet been concluded, but Far Eastone appears to have grown tired of waiting. In its statement on Wednesday, it accused regulators of unfairness and insisted the deal should have gone ahead based on precedent. The company said last year's change in ruling party and the regulatory delays that followed contributed to its decision to scrap the deal.

Tough sale

The announcement is a blow to MBK, a firm set up by 'Godfather of Asian private equity' Michael Kim with several partners. Due to its dominant position in a high-profile industry, the sale of CNS has sparked political and regulatory concerns amid fears that any deal could impinge on editorial independence.

In 2011, MBK made its first attempt to sell CNS to Want Want Holdings, the food-to-media conglomerate controlled by Taiwanese billionaire Tsai Eng-meng. Politicians feared the deal would hand effective control over the broadcaster to Beijing, given Tsai's strong business ties to the mainland. In the end, the deal was blocked on antitrust grounds because of Tsai's other media interests.

In 2014, MBK agreed to sell the stake to another Taiwanese conglomerate, Tingshin Group, for $2.4 billion. That deal was also scuppered when Tingshin was caught up in a scandal around the sale of unsafe "gutter oil" for human consumption later the same year.

Inspired by Macquarie’s partial exit of Taiwan Broadband Communications through the Singapore listing of Asian Pay Television Trust, MBK also considered selling through an investment trust in Singapore, although the plan did not materialise.

Regulatory minefield scares off PE

MBK's failure to exit CNS, which it bought into in 2007, underscores the regulatory challenges that may have discouraged more foreign investment into Taiwan.

A foreign buyer of Taiwanese assets must typically navigate a series of approvals from various government departments – including the Securities and Exchange Commission, the Fair Trade Commission and the Investment Commission under the Ministry of Economic Affairs, which oversees inbound and outbound investments.

In MBK’s case, it also needed approval from the National Communications Commission, Taiwan’s broadcasting regulator.

The process is far from smooth. Some of these government departments may have conflicting views, said a source familiar with the situation. A typical review from each regulator may take as long as six months.

This unfavourable environment is one reason private equity firms have pulled large investments away in recent years.

Swedish private equity firm EQT Partners sold Taiwan’s Gala TV to a local investment firm in 2014, three years after it acquired the assets, also from MBK Partners.

Macquarie’s private equity arm sold a stake Taiwan Broadband Communications in 2013, while Carlyle is also in the process of selling its 65% stake in Eastern Broadcasting to Taiwan Optical Platform, a local telecommunications service provider.

MBK has a track record of investing in telecommunications business across Asia, but it is turning away from Taiwan in favour of other developed regions. Late last year it jointly acquired Hong Kong’s Wharf T&T with TPG Capital, while it also owns South Korean pay-TV operator D’Live.

Citi advised Far Eastone while Morgan Stanley had advised MBK Partners on the attempted sale.

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