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Carlyle Group’s planned T$47.6bn ($1.5bn) acquisition of Eastern Multimedia, Taiwan’s largest broadband cable operator, was facing months of delay after the island’s new media regulator raised questions over the US private equity fund’s intentions.

The move makes the Carlyle deal, potentially one of the largest cross-border acquisitions in Taiwan in many years, an important early test of the policies of the National Communications Commission and its attitude towards foreign investment.

The NCC - which was set up only earlier this year to regulate the media and telecom industries - said on Friday it would ask Carlyle to explain how it would run Eastern Multimedia. The move was aimed at ensuring the private equity group’s entry to the market was not purely speculative in nature.

“In principle, we will certainly follow the general trend of liberalisation and opening up to foreign investment, as we hope foreign investors will bring in talent and technology and improve our industry,” said Wang Liu-lin, an NCC official working on the Carlyle deal.

“But since Carlyle has only just sold its stake in another operator in Taiwan, we want them to explain what exactly they plan to do with Eastern Multimedia.”

Carlyle sold a controlling stake in Taiwan Broadband, Eastern’s smaller rival, to Australia’s Macquarie Bank in an $880m deal late last year.

Regulatory approval of that deal has been seen as a precondition for progress on the Eastern acquisition because no foreign investor is allowed to control more than one third of Taiwan’s broadband market. The combination of the Taiwan Broadband and Eastern Multimedia stakes would exceed that limit.

Mr Wang said the Taiwan Broadband transaction had been approved under the condition that Carlyle and Macquarie presented a clear explanation of their relationship and proved they were not linked through affiliates in a way that would run counter to the island’s restrictions.

“To put it simply, we want to make sure that through the sale to Macquarie, Carlyle indeed relinquishes all control over Taiwan Broadband,” he said.

The NCC said that according to documents submitted by Carlyle and Eastern Multimedia, Carlyle intended to take 100 per cent control of the Taiwanese operator. Although this would run counter to the spirit of Taiwanese law, the regulator said it would not try to stop the deal for this reason.

“They are planning to take 100 per cent control by setting up a large number of related companies,” said Mr Wang. “They are using our legal loopholes here.”

Under Taiwanese law, foreigners are prohibited from directly owning more than 20 per cent of a local cable operator. Direct and indirect stakes combined may not exceed 60 per cent.

However, loopholes in Taiwan’s legal system allow foreign investors to use subsidiaries to accumulate up to 100 per cent control.

Eastern Multimedia said it had not received notice from the regulator yet but would comply with the law. Carlyle was not available for comment.

Copyright The Financial Times Limited 2017. All rights reserved.
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