China Mobile Ends Pact to Buy 12% Stake in Far EasTone

China Mobile Ltd.’s plan to buy part of Far EasTone Telecommunications Co., the first investment by a Chinese state-owned company in Taiwan in six decades, collapsed after the island wouldn’t ease ownership curbs.

The agreement for the world’s biggest phone company by users to spend NT$17.8 billion ($596 million) for 12 percent of Far EasTone was terminated and replaced by a framework for business cooperation, the companies said in a statement to the Taiwan Stock Exchange yesterday. The carriers may resume talks if the island’s ownership rules ease, they said.

Restrictions on Chinese companies owning stakes in telecommunications operators with networks scuttled the deal, which was unveiled in April 2009 when Far EasTone’s shares were about half their current value. The first investment by a mainland bank in a Taiwanese lender was announced this month after restrictions were eased for the finance industry.

“Things are more complicated in the telecom industry,” said Parker Wu, a fund manager at Agriculture Bank of Taiwan. “The government is a bit more cagey about Chinese influence in those companies as they possess personal information and that becomes a matter of national security. Taiwan and China’s relationship isn’t that close yet.”

Far EasTone rose 1 percent to NT$71.10 as of the close of Taipei trading and has lost 4.1 percent this year, compared with a 3 percent advance for the Taiex Index. China Mobile rose 1.3 percent to HK$82.15 in Hong Kong trading.

The 2009 proposal would have seen China Mobile pay NT$40 a share for the stake, 14 percent higher than the price of Far EasTone’s stock at the time.

Spying Potential

Douglas Hsu, the billionaire chairman of Far EasTone, last week said China Mobile was still keen on the stake. The Taipei-based company is Taiwan’s third-largest wireless carrier.

Zhang Xuan, a Beijing-based spokesman for China Mobile, wasn’t immediately available to comment.

“Category one telecommunication business involves security issues and is more sensitive, that’s the reason why we are not considering open it to Chinese investment,” said Emile Chang, deputy executive secretary of the Investment Commission at Taiwan’s Ministry of Economic Affairs.

The planned stake would have been the first direct investment by a Chinese state-owned company in Taiwan since the civil war as cross-strait relations warmed after the island’s president, Ma Ying-jeou, took office in 2008. All 692 members of Taiwan’s benchmark index rose after the deal was first announced on speculation more mainland Chinese companies would invest.

3G Advantage

“Telecoms is going to be off limits for a long time,” said Doug Young, author of the book “The Party Line: How the Media Dictates Public Opinion in Modern China.” The telecommunications sector “is a sensitive area with the potential for spying,” he said.

The collapse of the deal comes after a U.S. congressional committee in October said China-based Huawei Technologies Co. and ZTE Corp. provide opportunities for Chinese intelligence services to tamper with telecommunications networks for spying. Huawei’s founder, Ren Zhengfei, served in the Chinese military.

Shenzhen-based Huawei, the world’s second-largest maker of equipment for phone networks, has defended itself against those concerns.

Taiwan’s Technology

China Mobile said when announcing the deal that it would benefit from Taiwan’s “more advanced” third-generation wireless technology. China Mobile would have gotten a seat on Far EasTone’s board and become its second-largest shareholder, the Taipei-based company said at the time.

China Mobile’s share of the nation’s total 1.12 billion wireless users was 64 percent in January, according to data released in February. The carrier had 714.7 million mobile-phone subscribers at the end of January, including 95 million 3G users, it said.

Relations between China and Taiwan have improved since Ma took office in 2008 and dropped the pro-independence stance of predecessor Chen Shui-bian. While China says Taiwan is part of its territory, the two have been administered separately since Chiang Kai-shek’s Nationalists fled the mainland in 1949 after losing to Mao Zedong’s Communists in a civil war.

Before it's here, it's on the Bloomberg Terminal.