Already a fast-moving area, the pace of change in the technology, media and telecommunications (TMT) sector increased further during the COVID-19 pandemic, with this trend likely to continue in 2021.
In this three-part series, the Corrs TMT team unpack some of the key issues general counsel should be following closely this year.
In part two, we consider:
- digital infrastructure and 5G;
- technology-based M&A / venture capital deals;
- virtual trials and litigation post COVID-19; and
- media ownership reform.
Access part one here.
Mobile phone towers, sale of digital infrastructure and 5G - James North
As traditional core infrastructure assets face COVID-19 related headwinds, digital infrastructure assets have piqued the interest of pension funds and other investors. The assets that support the digital economy, examples of digital infrastructure include fibre networks and satellites that support internet connections, telecommunication towers that support mobile phone connectivity and data centres that support cloud computing services and data storage.
Digital infrastructure assets possess similar characteristics to traditional core infrastructure which have been favoured by financial investors. Cash flows for these assets are underpinned by long-term revenue contracts and the assets tend to be protected by strong barriers to entry (whether regulatory, market driven or commercial).
Throughout the COVID-19 pandemic, digital infrastructure has proved to be recession-proof, while other markets continue to be volatile. Trends such as the growth in cloud computing and Internet of Things (IoT) applications and geopolitical tensions increasing national security concerns are likely to drive significant growth in digital infrastructure investment in Australia.
Following a host of mobile phone tower transactions in Europe over the last few years, it also seems likely there will be a reasonable number of digital infrastructure assets coming to market. One factor driving these transactions is the need for mobile phone carriers to release capital from their towers and data centres to re-invest in spectrum and network equipment for 5G mobile networks. At the same time, data centre operators are also in need of significant capital funding to invest in the roll out of data centre networks, meaning there should be no shortage of greenfield and brownfield investment opportunities.
Investments in digital infrastructure raise a host of legal issues. Digital infrastructure tends to be highly regulated and subject to strict security obligations. The recent changes to Australia's foreign investment review framework (highlighted in Part 1) ensure there is oversight by FIRB into all foreign investments in certain classes of digital infrastructure, regardless of value of the investment. There is also unique regulator security. For example, owners and operators of communications infrastructure are subject to onerous cyber security obligations, including the telecommunication sector security reforms (TSSR), which provide the Critical Infrastructure Centre powers to oversee and direct the security of communication systems and services.
Surge in technology-based M&A / venture capital deals - Gaynor Tracey
Following a slow start to deal-making in the first half of 2020, we anticipate deals in the technology and software space will surge throughout 2021 on the tail of a strong end to 2020. As businesses continue to settle into the new normal of a COVID-19 environment and are able to shift their focus from managing pandemic-related impacts to potential merger discussions and opportunities, tech targets have a strong potential to drive deal activity in the coming year. The pandemic and likely endemic to follow have reinforced the value of technology-based assets to facilitate remote working and the more general demand for innovative digital infrastructures relating to e-commerce, cybersecurity, cloud infrastructure and 5G.
A number of these companies are opportunistically coming to market with strong competitive tension and bullish valuations for relatively young business in areas such as online retail platforms, telecommunications solutions and cyber security. Notable tech deals demonstrating this demand in 2020 include Mastercard's acquisition of Wameja, a cross-border payment technology company, and Bravura Solutions' acquisition of FinoComp, a data analytics and reporting software company.
The significant dry power that private equity are sitting on, combined with enticing low cost of funding, will no doubt further increase demand for new digital assets, encouraging competition in the market and driving higher valuations in 2021. With so much appetite for established tech companies, private equity is likely to continue the trend of investing earlier in the life-cycle of start-ups as we have seen over the last 12 months.
The resilience of the tech sector throughout 2020 was also reflected in record levels of venture capital investment in Australian start-ups, notwithstanding the impact of COVID-19, which included increased scrutiny from regulators such as FIRB. The sustained investment in start-ups shows growing investment opportunities in the digitisation of business solutions, which we expect to see continue into 2021.
While COVID-19 has no doubt brought about widespread uncertainty, it has affirmed and accelerated the necessity of digital solutions in staying productive and connected, allowing the technology sector to flourish in the deal space.
Virtual trials, litigation and 'lawyer cats' in a post-COVID world - Simon Johnson
While undoubtedly hilarious, the recent 'I'm not a cat' Zoom faux pas in the United States is indicative of some of the difficulties faced by Australian lawyers, barristers and the courts in quickly adapting solemn and formal legal processes to a remote format.
There is no doubt that the Australian litigation system moved exceptionally quickly and effectively to adopt a virtual hearing model from March and April 2020. It has been said that Australian Courts and Tribunals made ten years of technological advances in the space of just a few months. Contested hearings, appeals, interlocutory applications and directions hearings have all been conducted effectively and efficiently on a remote basis in a range of federal, state and local courts.
However, steps are being taken in many Australian jurisdictions to resume in-person appearances and hearings for 2021. Our prediction is that the COVID experience will see many proceedings in 2021 adopting a 'hybrid' model (e.g. case management being conducted virtually and witnesses outside the jurisdiction appearing remotely) in light of the time and cost-savings of virtual proceedings, and likely ongoing interstate and international travel restrictions.
Similarly, 2020 saw changes in a number of jurisdictions to enable document witnessing by audio visual link, and the electronic execution of certain documents. As many of these changes were temporary only, practitioners should be alive to the status of the measures in their jurisdiction at the time of applying electronic signatures or witnessing documents. It remains to be seen whether such changes will be adopted permanently.
Media ownership reform - Adam Foreman
In order for businesses to survive an increasingly challenging environment in which advertising revenues continue to decline, we believe further consolidation in traditional media, or joint venture or similar transactions which allow market participants to share resources, will be required in 2021.
It has now been more than three years since the media ownership rules were last relaxed to permit for the first time metropolitan and regional television mergers and cross media mergers between news, radio and television. The changes were intended to allow media companies to consolidate and generate greater scale and efficiencies, as a way of responding to the intense competition they faced from online, on-demand operators and offshore technology companies.
Those competitive headwinds have only grown stronger. At the same time, we have seen only one significant transaction take advantage of the new rules, which was the news, radio and television combination of Fairfax/Nine. Other transactions have been proposed, including the metropolitan and regional television merger of Seven West and Prime Media, but ultimately did not proceed. The logic behind these mergers continues to make sense, particularly for those businesses operating in regional areas, which have been particularly affected.
Mergers of metropolitan and regional television broadcasters as well as cross media mergers in both metropolitan and regional areas are likely to come back on the table this year as parties find a way to resolve valuation and other strategic issues that have prevented such transactions from proceeding to date. However, it may be that further changes in the media ownership laws are required to address the difficulties facing these businesses. The current rules continue to require that three independent television broadcasters operate in metropolitan and regional areas and it will be increasing difficult for advertising markets to support three independent broadcasters, particularly in regional areas, without significant sharing of infrastructure, resources and other costs between those broadcasters.
A media reform green paper released by the Australian Government in November 2020 proposed a number of reforms to help free-to-air television, particularly in regional areas, to support that sector move to a more sustainable business model, including by providing an option to eliminate broadcasting licence fees. While media ownership reforms were not specifically mentioned, the paper invited broadcasters to put forward other proposals which in their view would make their businesses more sustainable. Further consolidation or greater sharing of resources between broadcasters is another option some participants may argue would help create a more sustainable Australian broadcasting sector.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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