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posted 9 years ago
As bidders position themselves for the first ever acquisition of a towerco in Myanmar, we take a look at the possible acquisition structures, the required Government approvals and the key regulatory issues to consider. Or, can potential buyers still do a greenfield market entry instead?
As has been widely reported, one of the earliest towerco’s in Myanmar is for sale. Such an opportunity has of course captivated the interest of most everyone in the towerco community who is already in Myanmar, and those that want to be there. We thought that this might be a good time to offer some thoughts on how to buy a towerco in Myanmar. And, perhaps ask the alternative question as well: do I need to buy an existing towerco in Myanmar to get into the market?
Note that in the below, we do not refer to any particular company, but we offer thoughts that would be applicable to all Myanmar tower companies in general. Let’s call any one of those “the Target” in the below note.
Due diligence will not be easy
Not everyone is able to make sense of what they find in the data room. That is to say, when you buy Target you do so for the existing Master Lease Agreement (MLA), the existing assets and for the potential increase in revenue either through colocation or by means of more towers, or both. The commercial assessment aside, and given that everyone can read an MLA, the key challenge in the due diligence is actually the due diligence on the existing infrastructure network. It is easy enough to see if land was leased, towers constructed and sites RFI-ed.
What is much less obvious is the regulatory factor. Myanmar has not yet come to terms with the new needs in terms of regulatory framework of deployment of network infrastructure. Very often land use approvals, zoning changes, lease permitting and lease registration, construction permits and various other legal or regulatory requirements, some of them really crucial ones, are unclear or do not match with the realities of a towerco business model.
The problem is, you need to be really in the thick of it to know precisely which approvals or requirements a Target is still missing, what the risk is, and how much it will cost for you to go out there and fix it. The fact that there is no official list of requirements, and that authorities have different ideas on what paperwork you need from one area to another, does not help.
Take neighbor consents as an example. Getting something signed by the neighbors of a tower site that they agree there will be a tower just next to them has long been one of the blind spots of the Myanmar towerco industry. Very few towerco’s had this as an explicit part of the scope of work of their subcons, at least not early on. Now, whether this is actually required or not is another question. You will be hard pressed to find a single law or regulation stating this requirement, certainly in rural areas. But, in actual practice local officials may often require it before they agree to issue another form of approval, such as a construction permit or an approval to re-zone farmland.
None of the towerco’s in Myanmar is at this point in time able to fully comply with all laws and regulations in terms of land use, leases and construction simply because it is administratively or practically impossible to comply with a number of them, at least for now. So, it’s to some extent an industry issue rather than a Target issue. There is inherent uncertainty in the market, and everyone, including the operators (who had practically speaking limited options when they issued the RFI’s), seems to live with that for now. No one thinks that the Government will order thousands of towers to be dismantled or moved because of temporary flaws in the paperwork which reasonably speaking cannot be fixed by the industry at this point in time. However, it is not at all excluded that some sites must be moved as the Myanmar regulator will firm up site regulations in the future.
So, how can you tell whether Target has as many approvals as the other towerco’s? How to evaluate which ones it will almost certainly still need to get to the next step in its permitting? How much will it cost to send people back out there and get what is outstanding? Those are the issues that are very difficult to gauge in a due diligence unless you know exactly what you are talking about. And here, bidders who are existing towerco’s in Myanmar as well, have a strong advantage.
Share deal or asset deal?
It might seem quite a challenge to do an asset deal for a company that has over 1,000 land leases and permits which all need to be transferred. We are not sure if this would be anyone’s first choice. That said, there would be some pros to an asset deal. The buyer might want to have its own MIC Permit, a fresh start in terms of tax incentives. It might be tax efficient too to be able to amortize the price paid for the assets, rather than paying a premium for shares which cannot be amortized anywhere.
Nevertheless, even if assigning land leases is possible in theory (most lease agreements provide that the towerco has the right to do this without additional lessor consent), this would not be possible with the various local, divisional and national approvals that Target has already collected. Nobody wants to do that all over again.
Besides, the asset purchaser would have to obtain a new NFSC license before it can be operational, which will take months and is vulnerable to possible delays.
Do you need approval from the telecom regulator to buy a towerco in Myanmar?
As is well known, a towerco in Myanmar holds an actual telecom license, called an NFSC license. It is issued by the Posts and Telecommunications Department (PTD) of the Ministry of Telecommunications and Information Technology.
Under Myanmar regulations, if any transaction involves the acquisition of more than 15% of shares of a licensee, the transaction must be approved by the PTD in advance according to the review procedures. Furthermore, the Telecom Licensing Rules as well as all NFSC Licenses we have seen, mention the restrictions on transfer of control which are encapsulated in the Competition Rules. Although the Competition Rules are actually not yet in effect, the restrictions are still imported through the text of the license. If a “controlling interest” of the licensee and its operations are to be transferred, the transfer shall not take effect until the PTD gives its approval.
So, yes, you need PTD approval. Under the Licensing Rules (s. 20) the PTD must be asked for prior approval 60 days before the assigning of a controlling interest. It is also provided in s. 20 that “the Department shall not unreasonably withhold approval of a transfer or assignment, nor shall the Department unreasonably delay its decision. Timeframes for the Department to transfer a License are subject to the periods of review set forth in the Competition Rules” (generally 60 days).
Do you need PTD approval if you buy the foreign parent of a Myanmar towerco?
What if you buy a foreign company which owns quasi 100% of Target? Would you still need the PTD approval? In that regard, the definition of a “controlling interest” is important.
“Controlling interest” in the Telecommunication Law and the Licensing Rules refer to directly or indirectly transfer of more than 50% of voting stock, membership interest or general partnership in the licensee or that enables the purchaser with the right of the following:
• Appoint more than 50% of the board of directors or management committee or another entity;
• Appoint, promote, demote, and dismiss senior executives who control the day-to-day activities of another entity;
• Make critical investment, administrative or management decisions of another entity;
• Play a decisive role in management decisions of another entity;
• Manage the day-to-day operations of another company; or
• Make decisions or otherwise engage in practices or activities that determine or significantly influence the nature or types of services provided by another entity, the terms on which those services are offered or the prices charged for such services.
The key words are “direct or indirect”. If you buy a stake in a foreign company which leads to a change in control (50%, as defined above), you need PTD approval as well.
It is less clear if the same applies if there would be a sale offshore which does not lead to a change in control. Probably not. There is no clear legal basis to assume that an indirect transfer of a minority percentage of shares in the parent company of a licensee triggers the review procedure provided in the Licensing Rules.
PTD approval aside, what is easiest: buying offshore or onshore?
Besides the PTD approval, there are other Myanmar Government approvals in play in case of an onshore transfer.
First of all, the Myanmar Investment Commission (MIC). In general, Notification 11/2013 (the FIL Rules) state that transfer of some and of all shares in an MIC company (nearly all Myanmar towerco’s are MIC companies) requires approval from the MIC. One of the criteria to get that approval is “whether the transferee is able to continue with the project”. There is no guidance yet as to how strict or flexible the MIC interprets this and other conditions. In all likelihood, we think the MIC would simply line up with the PTD’s opinion, which is definitely required as was mentioned above.
Furthermore, the MIC will not approve the share transfer without a prior tax clearance by the tax authorities (Internal Revenue Department or IRD). This is not such a drawn out process as in some other Southeast Asian countries, and should not take more than a few months at the most. But, there is always the potential that there is a major dispute with the IRD, and in that case there may be delays. Another point to watch out for in the due diligence.
It is not likely that either the MIC or the IRD approval is needed for an offshore transfer. At least, there is no explicit legal basis to this effect. At least from that perspective there may thus be time gains in structuring an offshore acquisition.
Can another existing towerco be barred from buying?
The PTD has the right to reject the a planned transfer of a licensed business if it feels that such will lessen competition. The Competition Rules, which are specific to telecommunications, provide in some guidance although they are not yet actually in force.
In case of a combination between competitors, the largest 3 suppliers have a combined market share of 80% or more, and the resulting entity from the combination has less than 30%. This might very well be the case when an existing player in Myanmar scoops up the Target. The trouble is that no one is sure how to interpret the thresholds. For example, should this be calculated on a divisional basis (the Union of Myanmar has administrative divisions, most notably 7 states and 7 regions)? Or nationwide? You will have to face that issue when you request PTD for its approval.
Why buy at all? Why not do your own greenfield market entry?
It is of course an option. There is no limit at this time on NFSC towerco licenses in Myanmar. The whole process to obtain an NFSC license takes about 2 to 3 months in practice, if there are no delays. There is no legal reason why a new entrant cannot come in under the same legal and tax conditions as the existing ones. There is no requirement for a local partner, or a minimum capital. Some say the market is already too crowded, but we still see a healthy interest from new potential players.
As
bidders position themselves for the first ever acquisition of a towerco
in Myanmar, we take a look at the possible acquisition structures, the
required Government approvals and the key regulatory issues to consider.
Or, can potential buyers still do a greenfield market entry instead?
As has been widely reported, one of the earliest towerco’s in Myanmar
is for sale. Such an opportunity has of course captivated the interest
of most everyone in the towerco community who is already in Myanmar, and
those that want to be there. We thought that this might be a good time
to offer some thoughts on how to buy a towerco in Myanmar. And, perhaps
ask the alternative question as well: do I need to buy an existing
towerco in Myanmar to get into the market?
Note that in the below, we do not refer to any particular company,
but we offer thoughts that would be applicable to all Myanmar tower
companies in general. Let’s call any one of those “the Target” in the
below note.
Due diligence will not be easy
Not everyone is able to make sense of what they find in the data
room. That is to say, when you buy Target you do so for the existing
Master Lease Agreement (MLA), the existing assets and for the potential
increase in revenue either through colocation or by means of more
towers, or both. The commercial assessment aside, and given that
everyone can read an MLA, the key challenge in the due diligence is
actually the due diligence on the existing infrastructure network. It is
easy enough to see if land was leased, towers constructed and sites
RFI-ed.
What is much less obvious is the regulatory factor. Myanmar has not
yet come to terms with the new needs in terms of regulatory framework of
deployment of network infrastructure. Very often land use approvals,
zoning changes, lease permitting and lease registration, construction
permits and various other legal or regulatory requirements, some of them
really crucial ones, are unclear or do not match with the realities of a
towerco business model.
The problem is, you need to be really in the thick of it to know
precisely which approvals or requirements a Target is still missing,
what the risk is, and how much it will cost for you to go out there and
fix it. The fact that there is no official list of requirements, and
that authorities have different ideas on what paperwork you need from
one area to another, does not help.
Take neighbor consents as an example. Getting something signed by the
neighbors of a tower site that they agree there will be a tower just
next to them has long been one of the blind spots of the Myanmar towerco
industry. Very few towerco’s had this as an explicit part of the scope
of work of their subcons, at least not early on. Now, whether this is
actually required or not is another question. You will be hard pressed
to find a single law or regulation stating this requirement, certainly
in rural areas. But, in actual practice local officials may often
require it before they agree to issue another form of approval, such as a
construction permit or an approval to re-zone farmland.
None of the towerco’s in Myanmar is at this point in time able to
fully comply with all laws and regulations in terms of land use, leases
and construction simply because it is administratively or practically
impossible to comply with a number of them, at least for now. So, it’s
to some extent an industry issue rather than a Target issue. There is
inherent uncertainty in the market, and everyone, including the
operators (who had practically speaking limited options when they issued
the RFI’s), seems to live with that for now. No one thinks that the
Government will order thousands of towers to be dismantled or moved
because of temporary flaws in the paperwork which reasonably speaking
cannot be fixed by the industry at this point in time. However, it is
not at all excluded that some sites must be moved as the Myanmar
regulator will firm up site regulations in the future.
So, how can you tell whether Target has as many approvals as the
other towerco’s? How to evaluate which ones it will almost certainly
still need to get to the next step in its permitting? How much will it
cost to send people back out there and get what is outstanding? Those
are the issues that are very difficult to gauge in a due diligence
unless you know exactly what you are talking about. And here, bidders
who are existing towerco’s in Myanmar as well, have a strong advantage.
Share deal or asset deal?
It might seem quite a challenge to do an asset deal for a company
that has over 1,000 land leases and permits which all need to be
transferred. We are not sure if this would be anyone’s first choice.
That said, there would be some pros to an asset deal. The buyer might
want to have its own MIC Permit, a fresh start in terms of tax
incentives. It might be tax efficient too to be able to amortize the
price paid for the assets, rather than paying a premium for shares which
cannot be amortized anywhere.
Nevertheless, even if assigning land leases is possible in theory
(most lease agreements provide that the towerco has the right to do this
without additional lessor consent), this would not be possible with the
various local, divisional and national approvals that Target has
already collected. Nobody wants to do that all over again.
Besides, the asset purchaser would have to obtain a new NFSC license
before it can be operational, which will take months and is vulnerable
to possible delays.
Do you need approval from the telecom regulator to buy a towerco in Myanmar?
As is well known, a towerco in Myanmar holds an actual telecom
license, called an NFSC license. It is issued by the Posts and
Telecommunications Department (PTD) of the Ministry of
Telecommunications and Information Technology.
Under Myanmar regulations, if any transaction involves the
acquisition of more than 15% of shares of a licensee, the transaction
must be approved by the PTD in advance according to the review
procedures. Furthermore, the Telecom Licensing Rules as well as all NFSC
Licenses we have seen, mention the restrictions on transfer of control
which are encapsulated in the Competition Rules. Although the
Competition Rules are actually not yet in effect, the restrictions are
still imported through the text of the license. If a “controlling
interest” of the licensee and its operations are to be transferred, the
transfer shall not take effect until the PTD gives its approval.
So, yes, you need PTD approval. Under the Licensing Rules (s. 20) the
PTD must be asked for prior approval 60 days before the assigning of a
controlling interest. It is also provided in s. 20 that “the Department
shall not unreasonably withhold approval of a transfer or assignment,
nor shall the Department unreasonably delay its decision. Timeframes for
the Department to transfer a License are subject to the periods of
review set forth in the Competition Rules” (generally 60 days).
Do you need PTD approval if you buy the foreign parent of a Myanmar towerco?
What if you buy a foreign company which owns quasi 100% of Target?
Would you still need the PTD approval? In that regard, the definition of
a “controlling interest” is important.
“Controlling interest” in the Telecommunication Law and the
Licensing Rules refer to directly or indirectly transfer of more than
50% of voting stock, membership interest or general partnership in the
licensee or that enables the purchaser with the right of the following:
• Appoint more than 50% of the board of directors or management committee or another entity;
• Appoint, promote, demote, and dismiss senior executives who control the day-to-day activities of another entity;
• Make critical investment, administrative or management decisions of another entity;
• Play a decisive role in management decisions of another entity;
• Manage the day-to-day operations of another company; or
• Make decisions or otherwise engage in practices or activities that
determine or significantly influence the nature or types of services
provided by another entity, the terms on which those services are
offered or the prices charged for such services.
The key words are “direct or indirect”. If you buy a stake in a
foreign company which leads to a change in control (50%, as defined
above), you need PTD approval as well.
It is less clear if the same applies if there would be a sale
offshore which does not lead to a change in control. Probably not. There
is no clear legal basis to assume that an indirect transfer of a
minority percentage of shares in the parent company of a licensee
triggers the review procedure provided in the Licensing Rules.
PTD approval aside, what is easiest: buying offshore or onshore?
Besides the PTD approval, there are other Myanmar Government approvals in play in case of an onshore transfer.
First of all, the Myanmar Investment Commission (MIC). In general,
Notification 11/2013 (the FIL Rules) state that transfer of some and of
all shares in an MIC company (nearly all Myanmar towerco’s are MIC
companies) requires approval from the MIC. One of the criteria to get
that approval is “whether the transferee is able to continue with the
project”. There is no guidance yet as to how strict or flexible the MIC
interprets this and other conditions. In all likelihood, we think the
MIC would simply line up with the PTD’s opinion, which is definitely
required as was mentioned above.
Furthermore, the MIC will not approve the share transfer without a
prior tax clearance by the tax authorities (Internal Revenue Department
or IRD). This is not such a drawn out process as in some other Southeast
Asian countries, and should not take more than a few months at the
most. But, there is always the potential that there is a major dispute
with the IRD, and in that case there may be delays. Another point to
watch out for in the due diligence.
It is not likely that either the MIC or the IRD approval is needed
for an offshore transfer. At least, there is no explicit legal basis to
this effect. At least from that perspective there may thus be time gains
in structuring an offshore acquisition.
Can another existing towerco be barred from buying?
The PTD has the right to reject the a planned transfer of a licensed
business if it feels that such will lessen competition. The Competition
Rules, which are specific to telecommunications, provide in some
guidance although they are not yet actually in force.
In case of a combination between competitors, the largest 3 suppliers
have a combined market share of 80% or more, and the resulting entity
from the combination has less than 30%. This might very well be the case
when an existing player in Myanmar scoops up the Target. The trouble is
that no one is sure how to interpret the thresholds. For example,
should this be calculated on a divisional basis (the Union of Myanmar
has administrative divisions, most notably 7 states and 7 regions)? Or
nationwide? You will have to face that issue when you request PTD for
its approval.
Why buy at all? Why not do your own greenfield market entry?
It is of course an option. There is no limit at this time on NFSC
towerco licenses in Myanmar. The whole process to obtain an NFSC license
takes about 2 to 3 months in practice, if there are no delays. There is
no legal reason why a new entrant cannot come in under the same legal
and tax conditions as the existing ones. There is no requirement for a
local partner, or a minimum capital. Some say the market is already too
crowded, but we still see a healthy interest from new potential players.
– See more at: http://www.legal500.com/firms/34237-vdb-loi/press_releases/30571#sthash.G4HadQlU.dpuf
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