Whether it is advising on changing regulation, or how to jump Whether it is advising on changing regulation, or how to jump the hurdles regulation presents, firms are seeing increased business flow from a TMT sector heating up as companies seek to grow their market share or become targets for acquisition themselves

In spite of the innate regulatory hurdles, the Chinese media sector has been bubbling away in 2007, with two deal closures in recent months - the US$300m IPO of Xinhua Finance Media on the US NASDAQ, and the US$300m acquisition by advertising network operator Focus Media of internet advertising technology provider Alleys Information Technology -attesting to the health of this bourgeoning sector. The news is good news for law firms, capitalising on the transactions of active media clients.

Focus Media, which operates the largest out-of-home advertising network in China (using audiovisual flat-panel displays in commercial buildings), has itself been involved in a string of transactions since its US$170m IPO in 2005. Over that short period, backed by extra capital raised by a series of five follow-on offerings, it merged with a competitor in the same advertising market, Target Media (a deal that was a finalist at the recent ALB China Law Awards event in Shanghai), and acquired Shanghai Framedia Advertising Development followed by Alleyes, a foray into internet advertising. The group has also been involved in a number of smaller acquisitions in the media sector.

It also looks like there is no end in sight for the PRC media group's expansion. Focus Media general counsel Alex Yang says the company is growing very fast and intends to become the largest media group in PRC. "Accordingly, acquisition is the best way to expand our business and take the lead in the advertisement market. That's why we're so active in the capital market, and we did raise a lot of money to back our fast expansion." Yang says he expects to be involved in similar transactions in the future.

Local firm Fangda Partners snared the Allyes acquisition business from regular Focus Media counsel Global Law Office. However, Jinrong Liu of Global Law Office says Focus remains a long-term client of the firm, having worked on all its capital raisings and prior acquisitions. "There'll be further fundraisings for Focus Media and we're working on a couple of smaller private acquisitions for them," Liu says. Foreign firms have also been beneficiaries of Focus Media's pursuit of growth, with regular counsel Simpson Thacher & Bartlett advising on the US law aspects of many of its transactions. "We worked on the IPO in 2005, and since then worked on the five follow-on offerings as issuers counsel," Simpson Thacher partner Chris Lin says.

Fangda's success in capturing the Focus instruction for its latest acquisition is evidence of the competition being felt among local firms for these media clients, with this particular deal said to have been won on price. However, Focus Media's Yang says "the competition is intensive, but price is not important to Focus Media. Experience, quick response and flexibility is what we expect from professionals."

The recent Focus Media and Xinhua capital raisings are not isolated events in the sector, but part of a broader trend that law firms are watching closely. "I think the activities of China-based media companies will continue to be strong, particularly to raise funds in international markets," Chris Lin says. "I understand several media IPOs are being worked on as we speak, indicating strong financing activities out of China-based media." Lawyers expect this will have the resultant effect of further consolidation among media companies, as they attempt to bulk up and grow in scale.

The activity is also not limited to local companies, according to Allen & Overy partner Will McAuliffe. "Our media clients are on the acquisition path in China," he says. "One of the clients that we act for, which is one of the world's largest media groups, has been bolstering its position in China by acquiring media companies." McAuliffe says their group has worked on around a dozen acquisitions in the last couple of years in the media sector.

"Investment in the Media and IT sector has been significant. By international standards, this is still small, as the transactions are for smaller businesses rather than high-value assets, but relatively the volume of deals has been large," McAuliffe says.

Regulatory hurdles
It is no secret that the regulation of media in China is strict, often resulting in hurdles for such media deals, and a resultant increased amount of paperwork when it comes to approvals. Global Law Office's Liu says China still maintains very tight control over the content of its media, which has to be controlled by PRC investors. Other forms of media, such as newspapers and TV, cannot have any private investors - PRC or foreign. In comparison, the internet has been a relatively open medium when it comes to foreign investment, as demonstrated by the landmark Alibaba.com Yahoo! deal back in 2005.

"Regulation of the industry in China is very strict, and there are various regulations imposed on companies providing advertisements," Chris Lin says. "Compliance with the regulations is always the number one issue - for example when a company tries to go to an IPO. When we worked on the IPO of Focus Media, the parties involved spent an enormous amount of time on due diligence to ensure compliance," Lin says. Focus Media's Alex Yang agrees. "There exist certain regulations in this sector. Of course, I need to act cautiously under the advice of our outside counsels," he says.

McAuliffe says while the technology sector is not highly regulated, by comparison some aspects of the media sector are under a much higher level of regulatory control, which presents a layer of complexity that can become a hindrance to many of the deals that reach the application process. "It's a matter of obtaining the approvals by going to the regulators. This is often a document intensive process, and time consuming," he says.

Attractive telcos?
The activity seen in the telecommunications sector in China has been considerably less than what has been seen in the media sector. "Unfortunately, as much as we had hoped there would be a higher volume of work in the telecommunications sector in the last couple of years, we've been disappointed in the lack of activity," McAuliffe says.

Investor reluctance has been a result of uncertainty as to the future of the telecoms industry in China, and how it will be structured. At present, the PRC government is rumoured to be in the process of a major restructuring of the sector. There is also a lack of confidence in the foreign investment regulations governing the telecommunications industry, particularly the thresholds for investment in different areas of the industry.

However, Mainland China's lacklustre activity has been offset to some extent by cable TV activity in the greater China region, with major deals coming out of Taiwan. The trend was led by Macquarie Bank's 2005 acquisition of The Carlyle Group's interest in Taiwan Broadband Communications (TBC) for a total consideration of US$890m. This investment triggered a surge in the number of deals in the cable TV market, mostly leveraged, which has resulted in a lot of follow-on work for the firms involved.

With A&O having advised Macquarie, the purchaser, on the TBC deal, McAuliffe has been involved in a number of the follow-on deals. However, he says most of the larger deals in the Taiwan market have already been done. "We do expect there to be further consolidation in the industry, further M&A activity, and there are more deals in the pipeline, but it's mostly follow-on deals involving smaller acquisitions," he says.

As with the larger Macquarie deal, private equity, as well as venture capital, has played a large role in driving the telecoms market in Taiwan over the past two years.

The Mainland IT sector has also offset a flat telecoms industry. These deals have typically involved leading international IT companies acquiring Chinese IT companies as an entry to the market, which then act as a platform for distributing their international software products in China, and new domestic Chinese language products.

New regulations breed increased business
Across the Yellow Sea in tech-savvy South Korea, the telecommunications sector has never stood still for long, and is presently entering its next phase of evolution.

With the Korean government having recently issued a roadmap for the deregulation of the telecommunicatiosn sector, big changes are underway for telecom companies, with law firms expecting to capitalise on the resultant flow of legal work.

As companies will now be able to apply for telecommunications licenses on an entity basis, rather than on a service-by-service basis, this will now allow companies to provide a range of services in more of the US or European style of service delivery. "We think after the change in law, allowing a lot of new services to be delivered to customers, legal work will increase, based on moves by the telecom companies to deliver new services, and combine existing services," says Lee & Ko's Kwang Bae Park.

Park says the legal practice area is now becoming extremely specialised in Korea, with the new regulations on the potential consolidation of the sector very detailed, requiring specialised logic and experience. He says Lee & Ko has been involved in advising telecom clients on how they can respond to the new government regulations.