Vodafone Australia and TPG told to wait three months for merger decision

The final arguments have been presented to the Australian courts and now Vodafone Australia and TPG will have to wait until early 2020 for the decision on whether the $15 billion merger will be allowed.

This is a saga which has the potential to cause some long-term friction between the regulator and industry. Wherever you are around the world, best-case scenario would be collaboration between all elements of the ecosystem, but it does appear this is far from the case.

In a court case which has been on-going for just over three weeks, Justice John Middleton will now take into consideration all the arguments which have been presented. Unfortunately for those who are seeking a swift conclusion to the litigious chapter will be disappointed. Justice Middleton has said to expect a decision in January 2020, or potentially February.

Australian Competition and Consumer Commission (ACCC) took the decision to block the merger between Vodafone Australia and TPG on the grounds it would negatively impact competition in the future. The telcos are arguing this decision should be over-turned, suggesting it is the only way to ensure competition in a world which is quickly being defined by convergent operations.

This is a decision which will certainly disappoint someone. As patiently as Justice Middleton could look, there is no middle-ground between the feuding parties. The regulator is effectively accusing TPG of lying and the Vodafone/TPG representatives are suggesting the watchdog is not living in the realms of reality.

Looking at the perspective of the ACCC, the regulator believes the merger would prevent a fourth mobile player from emerging in the country. This is of course presuming TPG still has the appetite to deploy a network, and considering the telco has said it does not, the regulator is making a bold assertion.

Another interesting statement made by Michael Hodge QC, the lawyer representing the watchdog, is that its persistence to block the merger is based on “regulatory paternalism”. This is effectively a more acceptable way of saying ‘we know what better for you than you do’.

On the other side of the aisle, Vodafone and TPG are questioning whether the ACCC is looking at the same conundrum.

TPG did have an interest in diversifying revenues to enter into the mobile space, it was potentially going to do a ‘Jio Job’ to cause chaos, but the Huawei ban effectively put an end to this. Huawei was being touted as TPG’s main supplier of network infrastructure equipment, though the Australian ban for the vendor made financially unviable to pursue the network deployment, according to the telcos.

“Indeed, on the Commission’s evidence, TPG dodged a bullet that the network that they were rolling out would have been one of the great white elephants of Australian telecommunications history,” said Peter Brereton QC, representing Vodafone Australia at the trial.

If you believe the telcos, TPG is no-longer interested in building its own mobile network. It is not a financially attractive. Should the ACCC’s blockage of the merger stand, Australia will continue with three mobile network owners, though Vodafone will be in a weakened position to compete with the likes of Telstra and Optus.

This is the question which Justice Middleton needs to ponder. What is the best course of action for enhanced competition in the future? Three strengthened, converged telcos, or a fingers-crossed situation that TPG will be able to source CAPEX to fuel its own network deployment.

There are of course good and bad arguments on both sides of the aisle. The ACCC is potentially right to push for a disruptive fourth mobile provider, though is it reading the environment correctly? The telcos are of course correct to pursue a more comprehensive converged player, three top-tier telcos is certainly favourable than a duopoly, but there might be some nuanced language over the TPG appetite for network deployment moving forward.

The risk which could emerge is potential animosity. The UK’s connectivity landscape suffered due to friction between BT and regulator Ofcom, and there is potential for the same outcome here. Vodafone Australia and TPG only have one thing on their mind right now; a tie-up to challenge Optus and Telstra. The ACCC has taken somewhat of a patronising and stubborn stance, and seemingly does not want to consider the opportunity for increased competition with three converged operations.

Neither party is willing to budge, and it seems the loser will have to swallow a lot of pride to ensure a smooth relationship in the future.

Merged Vodafone Australia and TPG plan to raise convergence game

Competition and convergence are the key words as Vodafone Australia and TPG announce merger plans to lodge a challenge to market leaders Telstra and Optus.

Although the pair have stated there would no notable changes to either of the brands after the merger, the opportunity to cross-sell Vodafone’s mobile and TPG’s broadband offering could mount a serious challenge to the domination of Telstra and Optus who control more than 80% of the mobile market as it stands. Vodafone currently sits in third place in the market share race, accounting for just over 18% of Australian mobile consumers.

“This transaction accelerates Vodafone’s converged communications strategy and is consistent with our proactive approach to enhance the value of our portfolio of businesses,” said Nick Read, CEO-designate of Vodafone. “The combined listed company will be a more capable challenger to Telstra and Optus, and will be much better placed to invest in next generation mobile and fixed line services to benefit Australian consumers and businesses.”

TPG is currently Australia’s second largest broadband provider with 1.9 million subscribers, and has built a 11,000km-long fibre network primarily through acquisition, also offering wholesale broadband services to businesses. Alongside its solid position in the broadband space, TPG has also been registering interest for a launch into the mobile space, though what this now means for plans remains to be seen.

Over the course of the day, share price in Telstra has increased by 2.9% while Singtel, parent company of Optus, has witnessed a 2.19% boost (at the time of writing), perhaps indicating relief from investors. With TPG spending billions on a new mobile network and acquiring three of the thirty available spectrum lots in the most recent auction, the promise had been a fourth player to undercut rivals with a AUS$9.99 a month offering in Sydney, Melbourne, Adelaide, Canberra and Brisbane. While this had the potential to heavily disrupt the Australian market, it seems investors are confident such plans will be brushed aside in favour of convergence.

This does not mean clear sailing for the pair, but fighting on value is much more favourable than an troublesome challenger kicking off a race to the bottom. Vodafone has suggested the combination of the businesses will allow create a much broader footprint for the business, while also scale when investing in future-proof mobile and fixed networks. The immediate introduction of a convergence offer will certainly give disillusioned Telstra and Optus customers to think about.

Telstra has been having a rough time of it in recent years, with a 55% drop in market value since the appointment of CEO Andy Penn in May 2015. The recent launch of the Telstra2022 plan, targeting a simplified management and operational structure, had little impact on the mood of investors, perhaps as it coincided with the third network outage in seven weeks. As a strategy, it Telstra2022 was supposed to offer a vision of a more efficient and profitable organization, saving roughly $740 million over the next four years, with the ability to invest in the 5G era. Apparently not.

Optus as a business has been plodding along relatively comfortably. The last financial statement revealed revenue growth of 6%, continuing to grow its subscription base on both mobile and broadband offerings. Progress has not been exceptional, but few would complain.

The market on the whole has been pretty steady over the course of the last two years, Telstra might be losing a bit of market share to rivals, but nothing exceptional. A Vodafone/TPG tie up would change the status quo however. A third player able to offer convergent offers to the Australian customer certainly has the potential to cause problems. With a suspect nationalised network, a public spat with Huawei, the government attacking the users right to privacy through encryption and now this merger, Australia is certainly an interesting market right now.