TMT focus
Zil Ur Rehman Associate, Digital & Data
Ayidh Al Kahtani Intern, Digital & Data
The telecommunications industry is one of the world’s most swiftly growing sectors. Mergers and acquisitions (M&A) are often viewed as a desirable method of market entry and play a vital role in the development of the telecommunications industry. M&A in the telecommunications sector is a high priority for stakeholders in the Gulf region and we expect to see an exponential rise in regional activity in this area.
This article takes a closer look at the telecommunications regulatory landscape for M&A in the Kingdom of Saudi Arabia. M&A transactions crossing a certain threshold in the Saudi telecommunications sector typically require the approval of the Communications and Information Technology Commission (CITC) i.e. the telecommunications regulator (in addition to any other approvals). The basis of such approval is found in the Telecoms Act, Royal Decree No. (M/12) dated 12/03/1422H corresponding to 03/06/2001G. The Bylaws of the Telecoms Act (Bylaws) and the Procedural Rules for Mergers and Acquisitions in Communications and Information Technology Sector 2018 (M&A Rules) issued by the CITC set out further considerations in this respect.
A reviewable M&A transaction requiring approval of the CITC is one where:
A merger between a CITC licensee in the Kingdom and another service provider inside or outside the Kingdom.
An acquisition of five percent (5%) or more of the shares or interests of a service provider licensed by the CITC to work in the Kingdom; or
An acquisition of a percentage of the shares or interests of a service provider licensed by the CITC to work in the Kingdom, leading to the domination of a specific telecom market by one of the service providers.
Where a transaction falls under one of the scenarios outlined above, the transaction triggers review by the CITC and an application must be submitted to the CITC in order to obtain its approval for the contemplated M&A transaction. Failure to obtain the necessary approval is a specific violation of the Telecoms Act.
The CITC has considerable power to investigate and prosecute offences, including by establishing a Committee to consider and rule on violations. Penalties for non-compliance with the mentioned requirements can include fines, as well as an account of profits and publication of details of the violation and the violator.
The primary factor considered by the CITC during the review process is the effect on competition of the proposed transaction. Where there are concerns regarding competition, the CITC may balance these against other factors including benefits to the public. Specific considerations that the CITC must take into account when deciding a merger application include:
Considering whether the merger is likely to lead to a substantial prevention or elimination of competition, or to a significant exercise of dominance on a key part of a specific telecommunications market, for two or more years, compared with the impact of non-merger in whole or in part;
A specific telecommunications market is the smallest group of products and geographic areas wherein sellers can impose a considerable and steady increase in prices, for a non-temporary period exceeding the levels that would have probably prevailed in case of non-merger. In most cases, a percentage of five (5%) shall be deemed to be a considerable increase in prices, and a one-year period shall be considered temporary period;
No-objection, in general, to any merger if the merging entity is to solely dominate less than thirty percent (30%) of the share of a specific telecommunications market; and
No-objection, in general, to any merger based on precautions related to the mutual practice of the market potential if the share of the four key service providers in a specific telecommunications market upon the merger shall be less than sixty five percent (65%) of that market.
The primary factor considered by the CITC during the review process is the effect on competition of the proposed transaction. Where there are concerns regarding competition, the CITC may balance these against other factors including benefits to the public."
When applying the considerations above, the CITC must study the following factors:
To what extent foreign products or competitors can effectively compete with the telecommunications activities of the parties to an existing or proposed merger;
Whether the telecommunications activity, or any part thereof, owned by a party involved in the existing or proposed merger has failed or is likely to fail;
The availability of acceptable alternatives to the products provided by the parties to an existing or proposed merger;
Any obstacles to entry into a telecommunications market, including:
Customs tariffs and other obstacles to international trade;
Regulatory control on entry into such market; and
Any impact of the existing or proposed merger on such obstacles.
The extent to which the survival or viability of effective competition in a specific telecommunications market is affected or likely to be affected by the existing or proposed merger;
Any possibility that the existing or proposed merger will or may lead to the removal of a strong and effective competitor;
The nature and extent of change and development in a specific telecommunications market; and
Any other factors related to the competition in a specific telecommunications market that will or may be affected by the existing or proposed merger.
The M&A Rules require the applicant to inform the CITC regarding any preliminary agreement reached on a reviewable transaction within five (5) working days. Despite this, CITC would accept an application where this is submitted before entering into a legally binding agreement.
The CITC may hold discussions with involved parties prior to submission of the application. Any views given by CITC during this process are confidential and non-binding. After an application seeking CITC approval is submitted, the CITC must conduct its review within ninety (90) days of submission of the finalized application. The application process involves the following steps.
Review of the application
Providing the applicant parties with notes on any issues identified during any unofficial meeting with CITC in this regard.
Informing the applicant of considerations related to probable regulatory requirements, such as the accounting separation of the dominating service provider.
Issuance of the CITC decision.
Once the ninety (90) days review period expires, the CITC must either give approval, give conditional approval, reject the transaction or issue a notice to initiate an investigation. If the CITC decides to investigate a reviewable transaction, it will invite related parties to provide their comments. Where the CITC grants conditional approval, it may impose certain regulatory requirements for promoting competition
The M&A Rules also set out requirements on the form of the application, the information to be disclosed and the required supporting documents. They also address handling of confidential information during the application process. Parties undertaking an M&A deal in the telecommunications sector in Saudi Arabia must also consider any other regulatory approvals that may be required including from the general competition authority and the capital markets authority (where a listed company is involved).
For further information, please contact Zil Ur Rehman.
Published in June 2022
