TPG-Vodafone merger to go ahead after Federal Court ruling

$15 billion telco to combine VHA’s mobile network with TPG’s extensive broadband customer base

TPG Telecom logo / abstract communications network
TPG Telecom / Thinkstock

A merger of TPG and Vodafone Hutchison Australia (VHA) has received the greenlight from the Federal Court, with Justice Middleton this morning overruling the Australian Competition and Consumer Commission’s (ACCC) opposition to the telco mega-deal.

“The Court has come to the view that the proposed merger would not have the effect, nor be likely to have the effect, of substantially lessening competition in the supply of retail mobile services in Australia,” Justice Middleton ruled.

“Back in 2017, there was a moment in the affairs of TPG and [TPG executive chairperson] Mr [David] Teoh (the guiding force behind TPG) for a business opportunity to be taken to roll-out a retail mobile service,” the judge found.

“That moment has passed. To now leave TPG and Vodafone in their current state will not promote competition in the retail mobile market. A merger would not now, and would not likely in the relevant future, substantially lessen competition in the supply of retail mobile services in Australia.”

The new group will combine VHA’s mobile network with TPG’s large fixed-line broadband footprint, which includes iiNet and Internode, as well as extensive fibre assets.

TPG and Hutchison Telecommunications Australia, which owns 50 per cent of VHA, entered a trading halt ahead of this morning’s judgement.

In a statement VHA chief executive officer Iñaki Berroeta welcomed the decision, which he said would drive competition in Australia's telco market.

“It’s been 18 months since we commenced the approval process for this merger and we’re very keen to move forward and deliver these benefits as soon as possible,” he said.

“We have ambitious 5G rollout plans and the more quickly the merger can proceed, the faster we can deliver better competitive outcomes for Australian consumers and businesses.”

The deal is still subject to sign-off from the Australian Foreign Investment Review Board (FIRB) and the Committee for Foreign Investment in the United States (CFIUS), in addition to shareholder approvals.

TPG said that each of its directors intended to vote in favour of the merger.

“TPG is very pleased with the Federal Court decision and looks forward to combining with VHA to create Australia’s newest fully integrated telecommunications operator,” Teoh said in a statement. “We will work to finalise the other conditions to the merger as soon as possible.”

In a statement the ACCC left the door open to appealing the ruling: “The ACCC is carefully considering the judgment.”

The commision will have 28 days to appeal.

The merger is expected to be completed mid-2020.

The full details of the judgement will not be made public due to commercial sensitivities.

After many years of rumous about a possible tie-up between the two parties, TPG and VHA in August 2018 announced that they would carry out a “merger of equals” creating a new $15 billion telco.

The structure will see TPG own 49.9 per cent of the merged group, while VHA’s shareholders will own 50.1 per cent. VHA is a 50-50 joint venture between Vodafone and HTA.

Teoh have a 17.12 per cent stake in the post-merger entity. Investment firm Washington H. Soul Pattinson Limited will hold 12.61 per cent, and other TPG shareholders 20.17 per cent. Vodafone Group and HTA will each own 25.05 per cent of the merged group, which will be listed on the ASX and named TPG Telecom Limited.

The ACCC said in December 2018 that it would require additional information before it signed off on the merger.

A particular area of concern highlighted by the commission was the impact on competition in the mobile market: TPG in April 2017 announced it would , becoming Australia’s fourth mobile network operator (MNO). The network would be focused on coverage of major metro areas and based on small cells, TPG said.

The company has accumulated , and a joint venture with VHA — formed after the pair announced their intention to merge — spent $263 million picking up spectrum in the 3.5GHz band (which is being used by Australia’s telcos to deliver the first wave of 5G services).

After the ACCC revealed it would not rubber-stamp the merger, TPG in January 2019 said it was halting its mobile network rollout. The telco did not mention the ACCC in its announcement, instead blaming the government’s ban on the use of Huawei equipment for 5G. TPG said the ban meant that its planned 4G network would have no practical upgrade path to the newer standard, rendering the rollout pointless.

TPG’s decision did not have any evident effect on the ACCC’s views, however, and the competition watchdog in May 2019 published (in somewhat bizarre circumstances) its view that the merger would be a blow to competition.

In a statement accompanying that decision, ACCC chair Rod Sims said that TPG “has a commercial imperative to roll out its own mobile network giving it the flexibility to deliver both fixed and mobile services at competitive prices.”

“It has previously stated this and invested accordingly,” Sims said in the statement.

“Vodafone has likewise felt the need to enter the market for fixed broadband services. These moves by TPG and Vodafone are likely to improve competition and future market contestability,” Sims added.

Sims said he believed that TPG was the best prospect for Australia to have a fourth MNO.

Shortly after the ACCC released its decision, VHA launched court action.

Documents filed by VHA as part of the case argued that absent a merger with TPG, VHA’s owners were unlikely to receive a dividend from their investment in the telco over the next five years “if ever”.

VHA has yet to turn a profit, although its losses have progressively narrowed and its revenue grown.

VHA argued that TPG was unlikely to become a strong contender in the mobile market on its own, and that it was unlikely to become a strong fixed-line broadband player (VHA is a recent entry to the Australian broadband market, and only begun accepting orders for NBN services in December 2017)

TPG, which although it was listed as a respondent in the case, supported VHA’s court action and in its own legal filings the telco reiterated its claim that the government’s Huawei ban meant there was “no credible case” for it resuming its mobile network rollout.

During the case the ACCC argued that blocking the merger will lead to lower mobile prices for Australian consumers, and that some time over the next five years it is likely that TPG will revive its network rollout.

VHA in its results for the 12 months to December 2018 — the most recent full-year results released by the telco — revealed revenue of $3.65 billion for the 12 months to 31 December, which represented a 5.5 per cent increase on the prior year. EBITDA grew 13.4 per cent to $1.1 billion, while losses dropped 30 per cent year-on-year to $124.4 million, down from $177.8 million.

As of 30 July 2019, the telco had around 70,000 NBN customers and 5.64 million mobile customers (as well as an additional 350,000 mobile customers via resellers).

TPG for the 12 months ended 31 July 2019 reported revenue of $2.48 billion and a net profit after tax of $174 million. (In February 2019 it that following a review it reduced the value of spectrum licences it holds by $92 million and would write-down $76 million in capital expenditure associated with its dumped mobile network.) Including Internet and iiNet customers, TPG had 1.92 million broadband subscribers.


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