The telco has acquired a controlling stake in two of the region’s leading online businesses, Norstar Media and Autohome/PCPop. According to Mallesons partner and dealmaker Simon Milne, this strategy makes perfect sense because China’s youth are crazy about online.
“China is far more online-centric than other countries,” says Milne. “When you work there you realise just how much the youth of China and Chinese people generally are very, very online-focused. Everything is about interacting through online.”
Telstra’s 55 per cent acquisition of the two Chinese internet businesses consolidates the Australian telco’s position in the Chinese online market. Telstra CEO Sol Trujillo has described the Sensis arm of the company’s operations as “buy, find and sell business”.
The value of the deal has not been released, but auto and digital online advertising revenues in China are expected to triple between now and 2012.
Milne says the China M&A market is “an exciting place to be a lawyer right now”, and he predicts more growth for the area despite the global slowdown following recent regulatory changes.
“We’ve got a lot of China M&A specialists and I think the exciting thing about it from our point of view is that although there is a slight slowdown in growth, M&A in China hasn’t been affected by the credit crunch to nearly the same extent as the US,” he says.
“China is bringing in more regulation, not necessarily making it more difficult, but certainly prescribing exactly how they want to see foreigners invest, and there’s been a lot of changes — new M&A law, new labour laws, new environmental laws, new tax laws, all kind of tightening up and making things more regulated. [It’s] not necessarily harder, but certainly more regulated,” Milne says.
Milne and his team relished the opportunity to work with some of China’s most successful new economy entrepreneurs on the Telstra deal. Norstar was originally founded by Chairman Lan Jiang and operates an auto site — Che168.com — and digital device site — IT168.com. Autohome/PCPop was founded by young Chinese entrepreneur Li Xiang and operates the car site Autohome.com.cn and digital device site PCPop.com.
Milne describes himself as a gun for hire, with his trigger finger backed by both the Beijing and Hong Kong Mallesons offices: “So it was really a combination of deal-doers like myself — I’m really a hired gun if you like — and the guys in our Beijing office, who really had the regulatory expertise and the knowledge of Chinese law and the connections to make it work.”
A key client requirement was to meet Telstra’s shareholder expectations and guarantee the future value of the investment. This was a driving factor behind the 55 per cent acquisitions, according to Milne.
“It’s really the entrepreneurial drive of the management teams that Telstra is buying,” he says. “And if you buy them up 100 per cent … there’s a real question as to whether the same motivation is going to exist.”
The Mallesons team focused on structuring the investment to provide ongoing incentives to all parties to the transaction, including a strong retained equity plan and an inventive earn-out scheme for participants.
“Telstra has a strong interest in the entrepreneurs involved continuing to be thoroughly involved in the business and having a motive to make it work,” Milne explained,
“A lot of the focus was sort of on the shareholders’ agreement,” he says, “and when you invest in Asia generally, and this is certainly true for China, you rely a lot less on … warranties and legal remedies, contractual rights to take action than you do working in, say, the US. So our focus was really very much on coming up with a structure that would make the investment work, and incentivising all the parties to have a real interest in making it work.”
The final stage of negotiations was completed within a tight two-month timeframe. Other law firms working on the deal included North Star, US law firm Hogan Heights and two local Chinese firms. It was an intensive and demanding, but ultimately rewarding, process for all involved,
“We basically had an operating rhythm where we would meet all day with one group and then the other group and sometimes both groups and then turn to the documents overnight and meet again the next day.”
“Now in terms of the deal, it’s really the kind of deal that makes me enjoy what I do as a lawyer,” Milne enthuses.
“I really loved working in China and Asia generally. The people we’re dealing with are very entrepreneurial, they are very progressive.
“As you know, in Asia the relationship is enormously important and I think Telstra is now quite an experienced operator in China and equally really focuses on the relationships.”
With an eye on the changing regulatory environment, Milne predicts that strategic buyers who can wholly fund acquisitions will be well placed in the developing Chinese market.
He also says that Kevin Rudd enjoys quasi celebrity status in China, and the PM’s rising star coincides with growing interest in outbound Chinese investment into Australia.