China Mobile Scraps Taiwan Tie-Up

China Mobile scraps Far EasTone tie-up

My first reaction to reading the news that mobile carrier China Mobile (HKEx: 941) had formally scrapped a 4-year-old plan to buy a stake in Taiwanese peer Far EasTone (Taipei: 4904) was: What took them so long? In fact, I wasn’t even aware that China Mobile still even considered this tie-up alive, as the deal attracted controversy from the moment the 2 sides announced it in 2009. This formal scrapping of the deal does seem to represent a milestone of sorts, as it shows that we won’t see any M&A in the sensitive telecoms sectors across the Taiwan Strait anytime soon despite ever warming ties between China and Taiwan.But this setback doesn’t mean we won’t see M&A between China and Taiwan in other less sensitive sectors, and we could even see a strategic tie-up or two in the telecoms space under certain conditions. I’ll return to that subject shortly, but first let’s look at the latest news that has China Mobile formally announcing the termination of its plan to buy 12 percent of FarEastone, the smallest of Taiwan’s 3 major wireless carriers. (company announcement) China Mobile says the deal failed to meet certain conditions to close, and industry watchers will know that means it didn’t get approval from Taiwan regulators.

The deal itself was signed during a wave of euphoria after Taiwan’s 2008 election of China-friendly President Ma Ying-jeou, ushering in a new era of warmer ties between the former Cold War enemies. But the deal immediately attracted controversy, as such investments weren’t allowed at the time and still remain off-limits due to the sensitivity of the telecoms industry. Chinese networking equipment giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063) have learned the same lesson over the last year, after being barred from selling equipment for government networks in the US and Australia over fears such equipment could be used for spying by Beijing. (previous post)

Despite the long odds against it, China Mobile and Far EasTone continued to insist as recently as 2010 that the deal was still alive. But reporters stopped asking about the deal over the last couple of years, as most had assumed it was either dead or on indefinite hold. This latest announcement finally brings some closure to the story, and shows that major progress on cross-strait investment in the telecoms sector is unlikely anytime soon.

But that said, we should still expect to see cross-strait tie-ups in other less sensitive areas, and could even see a telecoms partnership that would avoid some of the touchier issues. Earlier this month, ICBC (HKEx: 1398; Shanghai: 601398) became the first major Chinese lender to do a strategic cross-strait tie-up with its announcement that it would pay $680 million for 20 percent of Sinopac Financial (Taipei: 2890), a major Taiwanese bank. (previous post) Taiwan’s Fubon Financial (Taipei: 2881) has made similar investments in Chinese lenders.

While equity investments seem off limits for now in the telecoms space, we could still see some strategic tie-ups in other less sensitive areas. One of those could be virtual network operation (VNO), which lets carriers lease out capacity on their networks to third parties who can then sell telecoms services under their own brand names.

China is in the process of laying out rules that should allow the launch of 6 new VNOs by the end of this year, though the initial batch of licensees are all likely to be domestic companies. Taiwan could also allow such VNOs, which are less sensitive because they don’t require giving third-party licensees actual access to the equipment used to operate networks. Following the formal collapse of this China Mobile-Far EasTone tie-up, I wouldn’t be surprised to see the 2 sides try to negotiate a less controversial deal that could be announced by the end of next year.

Bottom line: The collapse China Mobiles plan to invest in a Taiwan peer shows that such deals won’t be allowed in the near term, but less sensitive tie-ups could come.

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