Doing deals in emerging markets
As the appetite for investment in the world’s fastest-growing telecoms markets remains high and is set to intensify, investors must overcome technical, financial, regulatory, intellectual property and transactional issues, which can make or break a deal, write Bruce Embley and Bertram Burtscher.
Investing in emerging markets: 10 key issues
Investing successfully in emerging telecoms markets takes careful planning and foresight. From our experience of working on some of the biggest international deals in recent years, here are some of the key issues investors need to factor into their thinking.
1. Understanding the local regulatory environment
Regulatory regimes are by no means uniform but many impose onerous constraints on operators. Regulators often model their activities on mature markets, where the need for sophisticated competition and consumer regulation is clear. As a result, regulation can sometimes seem years ahead of market need and may not necessarily square with the expectations investors derive from other formal statutes and regulations. Understanding the local regulatory environment in very practical terms and tailoring deals to succeed within it is vital to success. In numerous cases, we have helped clients negotiate with regulators, drawing on our in-depth knowledge of telecoms regulation across the world and our understanding of local priorities. Negotiating the best possible terms for entry into a new country or investment can have a huge bearing on the ongoing success of the target business. Further, face-to-face meetings with the relevant regulators is essential. Investors that short circuit this process may upset the regulator or worse. Such a meeting is also a great opportunity for an investor to understand the regulator’s view of the target investment and the telecoms market in that jurisdiction.
2. Selecting strategic partners
Foreign direct investment controls prevalent in so many emerging market countries mean that investors will rarely have the opportunity to go it alone and must look to work with local — and sometimes international — partners. Whether you need acceptable co-investors, infrastructure-sharing partners or suitable content providers, strategic partnerships are key. Negotiating partnership agreements that protect the long-term value of the investment is therefore an absolute necessity. When we help operators negotiate strategic partnership agreements we keep a fixed eye on likelymedium and long-term scenarios to help best maximise commercial objectives and subsequent success. We have been working with operators to do this in a large number of emerging market jurisdictions.
3. Structuring multi-jurisdictional deals
Some of the world’s biggest recent international telecoms deals are by their nature multi-jurisdictional. To succeed, investors need to work with advisers who can manage a complex web of overlapping work streams and can reconcile the demands of numerous regulatory, tax and government bodies. These transactions often involve an unprecedented level of detailed analysis for each jurisdiction, from negotiating change-of-control provisions to finding a workable foreign exchange structure.
4. Overcoming protectionist tendencies
In most economies, telecoms is viewed as a strategic industry — and sometimes it is regarded as being of significant importance to a country’s national security. Unsurprisingly, the sector is often subject to tight political control. The credit crunch has exacerbated nationalist sentiment in both mature and emerging markets so it has become increasingly important for operators to find solutions to potential protectionist trends, many of which go beyond day-to-day market regulation into the realms of international law and trade treaties. A government’s negative stance regarding any particular foreign investor does not have to be the end of the story. Use of bilateral investment treaties is an increasingly effective tool, and investors can structure their investments at the outset to maximise their effectiveness.
5. Managing infrastructure agreements
Since many target markets are new or immature, operators will often face the prospect of creating networks from scratch, working on greenfield sites. Whether rolling out a new network or investing in an existing one, operators will need to plan carefully how they manage their infrastructure. Overcoming engineering and logistical challenges is only part of the story. It is equally important to ensure that infrastructure-sharing agreements provide adequate protection for investors’ rights and royalties. Drawing up the right agreements to manage the network financing and procurement procedures is crucial.
6. Extracting value
Investment is not an end in itself. No deal will win financial and shareholder backing unless value can be extracted and adequate returns made. From the outset the right mechanisms – such as offshore licensing agreements and royalty payments – must be in place to allow capital to flow out of the jurisdiction and back to the investor. Structuring such deals requires intimate knowledge of local laws and regulation but also an understanding of overlapping international tax regimes and foreign exchange rules. The relevant legal environment also needs to be fully understood to ensure that any legal impediments to extracting value can be worked around.
7. Maintaining confidentiality
In-depth local market knowledge is not all about understanding rules and regulations. It’s also about knowing how local business culture works. Many investors approaching new and emerging markets are taken aback by the fact that ways of doing business can differ radically from what they are used to. Confidentiality is a case in point. It is seen as a fundamental principle of doing business in mature markets. In developing economies, however, attitudes to confidentiality can be far more relaxed. Investors must be highly selective about disseminating information. One solution is to hold meetings in a completely neutral and unconnected country to reduce the chance of leakage. It’s this sort of strategic planning that can make the difference to a deal’s success.
Norms of acceptable business practice vary radically from market to market. What’s seen as unacceptable behaviour in one may be considered legitimate in another. Recent laws, such as the US Foreign Corrupt Practices Act and the restricted list of individuals and organisations issued by the US Office of Foreign Assets Control, have become a major concern for organisations across all sectors investing in emerging markets. These laws aim to make sure that companies observe ethical business standards on issues such as bribery and corruption wherever they operate in the world. Of course, what constitutes bribery in one jurisdiction may be far more acceptable in another. But punitive sanctions can be imposed on those found to be in default. As public pressure for greater corporate and social responsibility grows, such international laws and policies are gaining in importance.
9. Successful outward investment
With economic power shifting from west to east, investment flows are also changing course. Many observers believe it is only a matter of time before the new telecoms giants in markets such as China and India mount a significant competitive challenge globally — as evidenced by Bharti’s $10.7 billion acquisition of Zain’s African business. And it’s not just a case of investing in networks. China has, for example, asserted its technological independence by establishing its own standard for 3G mobile telephony. Handset makers are beginning to offer cheaper devices and network equipment in more advanced jurisdictions and content providers are looking for new international opportunities. Operators need their advisors to be able to anticipate the needs of new investors, offer global market insights and understand appropriate tax regimes in order to ensure efficient funding of overseas investments.
10 Protecting your rights
Many emerging markets’ judicial systems are less developed than those in mature markets. Outside parties can therefore struggle to enforce their contractual rights, particularly in a sector as politically charged as telecoms. If a legal right is unenforceable as a matter of law or practice, then it is potentially meaningless. Operators need to work with their advisors to put in place legal and contractual frameworks to protect them against these risks. There is no one-size-fits-all solution, but it is crucial that businesses understand that their rights should and can be upheld. Protecting an organisation’s intellectual property is also often a key concern due to the number and complexity of potential issues such as licensed technology and brand. Structuring your IP portfolio to be tax efficient and commercially flexible also offers long term benefits.