Reproduced from an article by Mike Conradi and Christian Keogh in SubTel Forum Issue #141 – Finance & Legal (March 2025)

Due diligence is a crucial element of any M&A deal. The term  refers to one of the activities undertaken by a purchaser prior to closing a deal, in order to better understand the business that it is acquiring.

The due diligence process can assist a purchaser in understanding the risks associated with proceeding with a transaction, and can ultimately shape the deal which is being entered into between a purchaser and seller, including in the following ways:

  • Due diligence assists in identifying any material risks arising from an acquisition, that, if a purchaser moves forward with the acquisition, would need to be mitigated through warranty coverage or indemnification.
  • Identifying specific actions to be taken before or after completion, such as following any processes that were agreed with customers and suppliers which may be triggered as a result of the transaction occurring (such as obtaining a counterparty’s consent to a change of control in a share sale, or following specific processes for the assignment and novation of contracts in an asset sale).
  • Informing the value of the deal.
  • Helping the purchaser reconsider if it is in its interests to close the deal.

Due diligence of a submarine cable business is no different to due diligence conducted over any commercial business. However, there are a number of nuances involved in a submarine cable business which will need to be taken into account to ensure that relevant risks are identified and mitigated.

We have prepared this article based on our experience working on submarine cable transactions, and have set out some of the specific issues to be considered by a purchaser of a submarine cable business (which we will refer to as the “Target”), in the following key areas:

  • infrastructure assets;
  • customer contracts;
  • supply contracts;
  • permits and licensing; and
  • separation issues.

This article looks at legal due diligence, where the focus is on identifying legal risks arising from contractual arrangements, compliance with law, and permits and licensing in place (among other issues). We do not consider technical or commercial issues.

Infrastructure assets

The main infrastructure assets of a Target will be the submarine cable system itself (or the systems, if more than one).

A Target’s ability to provide capacity, IRUs over fibre pairs on a system, or other services over the system, requires the Target to have requisite rights over the submarine cable system (or part of that system). It is therefore crucial for a purchaser to conduct due diligence on the submarine cable infrastructure assets that are part of a deal, to ensure that the Target has all necessary rights to the assets and infrastructure which a seller claims.

A Target’s interest in a submarine cable system can take several forms, including legal ownership of a system (which can be sole ownership or joint ownership as part of a consortium arrangement), or a wholesale arrangement where the Target (as a customer) is provided with rights of use to fibre pairs on a system owned by a third party.

Each of these “interests” give rise to different matters for consideration as part of the legal due diligence process, as follows:

  • Sole ownership – If the Target is the sole owner of a system, all matters relevant to the system will generally be the owner’s responsibility, including procuring the construction of the system via a supply contract, being responsible for landing the cable at relevant landing points (including holding associated permits and licences for the landing of the cable), and arranging maintenance for the system.

Where sole ownership is involved, it will be important that the contracts for each of these arrangements be reviewed in detail.

  • Joint ownership – A common ownership model for submarine cable systems is via consortium arrangement. Here, several parties co-invest into the joint build of a submarine cable system, and will own a certain number of fibre pairs on the system in proportion to their level of investment into the system.

Some matters to consider for joint ownership models include the following:

  • Joint Build Agreement (JBA): Members of a consortium will enter into a JBA (which could also be called a “Construction & Maintenance Agreement” or C&MA), which sets out each party’s obligations to each other, and the processes for appointing a submarine cable supplier and maintenance provider and other key contractors. A JBA should also include a governance process for decision making by the consortium, where decisions are taken by vote.

Typically a JBA will allocate individual fibre pairs for the exclusive use and ownership of designated parties, with all other assets (like repeaters) being shared between all consortium members. By contrast usually under a C&MA the entire system and all its assets are shared on some agreed basis. However there is no set rule on this and the only way to understand exactly what assets the Target has will be to read the contract.

It will be important to review the JBA in place, to understand any obligations the Target has to its consortium members (including any need to obtain consortium members’ consent to a change of control of the Target) and any instances where other consortium members can exert power over the cable system without the Target’s approval (eg through voting arrangements). It will also be important to identify any clauses that may require the Target to offer capacity to other co-owners before selling such capacity to a third party customer (which tends to be an obligation which applies in the first few years after the Ready for Service (RFS) date of the system).

  • Supply and maintenance: Usually a JBA will set out how the parties will arrange for, and enter into, a contract for the construction and supply of the system itself, and operations and maintenance arrangements for the system.

It is possible that the Target will not be the party responsible for such arrangements and will not be a direct counterparty to the relevant contracts for these matters. Notwithstanding this, it will still be crucial that these contracts be reviewed as they will contain matters which impact the asset (such as what warranty obligations apply and whether these can be relied upon directly by the Target).

  • Landing and permits: It is common for a JBA to establish which parties will take on responsibilities as “landing party” of the cable on behalf of other JBA parties, and will enter into Landing Party Agreements (LPAs) with the other consortium members (however, note that third parties can also be selected as landing parties).

It will be important to identify all landing points where the Target is acting as the landing party, and to verify that permits and licences are held by the Target for the landing of the cable, and to review the obligations on the Target in the LPA itself –matters to confirm will include ensuring the Target receives compensation when acting as Landing party, and matters as to reimbursement of costs the Target may incur on behalf of other consortium members.

Where the Target is not the landing party, these arrangements should be reviewed and to ensure that a party is contractually liable to hold relevant permits for the landing of the cable.

It is increasingly common for LPAs  to require “open access” terms. This term should be defined in the LPA but it tends to indicate that the designated landing party must offer access to the landing station for the purposes of providing backhaul to any licensed operator in the country on fair and equal terms, and also must offer cross-connects and rackspace within the landing station on an agreed (often price capped) basis.

  • IRUs and Lease arrangements – A Target may not own a system, it might instead hold an IRU to fibre pairs or spectrum/capacity on the system of a third party submarine cable owner.

For these arrangements, the Target is usually a wholesale customer. As a customer, it will not be party to any JBAs, supply contracts, landing party agreements, and will not need to hold any permits for the cable itself, which will all be the responsibility of the “supplier”.

As a customer, the key contractual arrangement to review would be the agreement with the owner of the system, and to ensure that this arrangement provides for guaranteed access to a fibre pair or to capacity on the system.

Customer contracts

Due diligence on customer agreements is focused on checking that there are no risks to the continued revenue pipeline for the Target, and that the size of the Target business reflects what has been represented by the seller as well as ensuring that there are no unusual liabilities. When reviewing these matters, there are a number of nuances to consider for submarine cable businesses, including the following:

  • The majority of the total contract value under customer agreements is paid up-front: The majority of revenue made by a submarine cable business is through the sale of “indefeasible rights of use” (IRU) over the cable system (which can include an IRU over whole fibre pairs, or to capacity/spectrum on a fibre pair).

Under an IRU, the majority of the total contract value is usually paid upfront (or in the early stages of the arrangement) as a non-recurring charge. Once the non-recurring charge has been paid, a much smaller recurring charge is payable in respect of operations  and maintenance (O&M) and other maintenance services.

When considering the value of the customer arrangements in place in a due diligence exercise, the focus should therefore not be on the “total contract value” as this would inflate the ongoing value of the customer to the Target.  Rather, the focus should be on the remaining value payable under the contract as of the date of the due diligence exercise.

In addition to this, the inclusion of hair triggers for termination in a customer contract may not matter if the majority of the value of the contract has already been paid upfront. However, it should be checked that there is no requirement for the non-recurring charge to be refunded on termination of the IRU even some years after the RFS date (although this is uncommon we have seen examples of this).

  • Contracts can include most favoured customer clauses – Customers may negotiate “most favoured customer” (MFC) clauses into their agreements, requiring that they be provided with terms that are at least as favourable as those provided to the Target’s other customers.

It should be confirmed that the Target has complied with any most favoured customer clauses, as any non-compliance may require the Target to provide a retrospective refund to a customer. Depending on the way the clause has been drafted, the potential liability for the Target could be very significant – especially if the MFC obligation extends until some period  after the RFS date (wince prices for given amounts of capacity on submarine cable systems tend to fall over time anyway).

  • Contracts should be checked to see if there are any limitations on the Target’s ability to sell capacity

Other customer-favourable clauses can exist in customer contracts which restrict the Target’s freedom to enter into deals with third parties. This includes clauses where existing customers are permitted to reserve capacity, or where customers are provided with first rights of refusal over any capacity sold on the system.

Where these clauses have been agreed by the Target, it should be considered if these clauses have generally been complied with by the Target. However, it should also be noted that any protracted process may hamper a Target’s ability to run efficiently and to jump on new opportunities.  

Supply contracts

Key matters to understand on the supply side include the extent to which the Target is reliant on third parties for running the business, and how robust its contractual arrangements are with these suppliers.

Some of the key supply agreements for a submarine cable operator will be the turnkey supply contract for the system itself, maintenance arrangements, network operating centre (NOC) services arrangements, and crossing agreements. These agreements will need to be reviewed as relevant (see our comments in the section above on infrastructure assets), and any key risks called out. Below, we provide some views and commentary on some of these agreements and any specific issues to be considered:

  • Submarine cable supply agreement – It is common for submarine cable supply agreements to permit the customer to retain a percentage of the total contract value until the system is “accepted” as RFS. From a purchaser’s perspective, retentions constitute a potential future liability for the Target until they have been paid. It is therefore important to understand whether any “retentions” exist that could be payable by a Target, their value and when they are likely to fall due. Where retentions may need to be paid after closing and completion, a purchaser should consider the deal value and whether any adjustment should be made or indemnification requested.
  • Crossing agreements: It is common for submarine cables to meet and need to “cross” (i.e. be placed over) other submarine infrastructure (including other submarine cables, as well as oil or gas pipelines). “Crossing agreements” are entered into by the owners of such infrastructure prior to the “crossing” taking place, to deal with matters such as the procedure for the crossing, liability for damage and insurance requirements etc.

These arrangements can often provide for significant  liability for damage caused by a crossing party though of course the main risk of damage arising is at the time the crossing itself is made. As such, for a cable system that has already been laid the practical risks of these onerous liability provisions applying may be low. In light of this, requesting all crossing agreements the Target is a party to may not be necessary; instead, it may be better to raise relevant queries with the seller to better understand what risk applies in relation to crossings, and whether such a request would be appropriate.

Permits and licences

As communications networks, submarine cable systems are subject to various licensing and authorisation requirements. This includes the following:

  • Telecom licences – As part of the due diligence on a Target, this should include confirming that relevant telecommunications licences are held. It will also be important to check that there are no restrictions or requirements relating to changes of control of the Target. In some cases, a regulator will need to be notified, and approval obtained, prior to a change of control occurring. Where approval is required, this should be factored into the relevant deal agreements.
  • Landing parties, and landing party agreements – As set out in the section above on due diligence of the infrastructure asset, it should be checked that relevant arrangements are in place for the landing of the cable. Where a cable is solely owned by the Target, then it should be checked that the Target has necessary permits and licences in place for the landing of the cable.

Where a cable is co-owned, it should be verified which consortium member (or third party landing party) is responsible for landing the cable and that a landing party agreement has been entered into. Where the Target is the landing party, it should be checked that the Target holds relevant license and permits to land the cable, and the LPA  should also be reviewed (see our comments above in relation to landing party agreements and relevant issues).

Separation issues

It is possible that a deal may only involve the divestment or carve out of part of the business or certain submarine cable systems in the seller’s overall portfolio.

At times, the divested part of the seller’s business may not be a self-contained unit and may rely on arrangements in place at the broader parent level, or held by another part of the group that will be retained by the seller.  There is a need to assess these “separation issues” and address how these issues will be resolved prior to completion.

Some specific questions to ask to help identify any separation issues include the following:

  1. Where the deal is structured as a share sale, are agreements held by the right entity? If key agreements are held by an entity that will be retained by the seller, then such agreements will need to be reviewed for any limits on novation/assignment to the divested entity and any processes to be followed in respect of such novation/assignment.
  • Is the Target obliged to provide capacity over systems which are retained by the seller? If so, then the purchaser will not be able to comply with its obligations to a customer unless an arrangement is entered into with the seller to permit this (such as by the seller selling relevant capacity or an IRU to the purchaser).
  • Are there any shared supply agreements? Where there are any shared supply arrangements (i.e where the divested entity is party to a supply agreement that services both the divested and retained businesses, and vice versa) then typically the agreement will stay with the contracting entity. It will be necessary for the other part of the business to enter into its own arrangement with the supplier directly. Where such shared supply arrangements exist, a purchaser should ask the seller for their plans for dealing with such arrangements which should be recorded in the sale contract.
  • Have any parent company guarantees been given by a part of the business that is not being sold? If so, then such guarantees will need to be replaced. Relevant obligations should be included to ensure that this is done before completion.

Conclusion

The issues set out in this article are just the tip of the iceberg of issues which we have seen. It is important when conducting due diligence on a submarine cable business that the specific nuances of running a submarine cable business are understood, as failure to understand these nuances may mean specific issues are missed, or even that whole contracts are not reviewed.  Similarly a proper understanding of the specific nature of the submarine cable business means it is possible to avoid focussing unnecessarily on issues which do not matter  in this context, even though similar issues might be important for other types of business.